How does investing in real estate compare with other financial vehicles like a high-yield savings account?
While the two have some similarities — for example, both can earn interest — the biggest differences come down to taxes and timing.
Rates for high-yield savings accounts fluctuate and can offer a higher return rate than traditional savings. Real estate investments often offer consistent returns over time. That could mean that one occasionally outperforms the other.
But you also have to consider tax implications. Interest from high-yield savings accounts is taxed at your highest marginal tax rate. If you’re a high earner in a high-tax state, that could mean paying nearly 45% in taxes. Appreciation from real estate is taxed under capital gains rates, or around 15% for most people.
Here’s how it breaks down:
Consider market fluctuations
Real estate and earnings from high-yield savings accounts can fluctuate like any investment.
The economy is constantly evolving. Take inflation, for example. In 2022, inflation often felt like a runaway train. The Federal Reserve responded with rate hikes to cool off inflation and stabilize the economy. On the one hand, that’s not great news, as rate hikes usually increase variable interest rates on financial products like credit cards. But on the other hand, a Fed rate hike can also increase APYs on vehicles like high-yield savings accounts.
And in this case, it worked. As of September 2023, high-yield savings accounts are earning as much as 5.00% APY (and higher in some cases). When APYs are high, it might make sense to stash your cash in a high-yield savings account, especially over a traditional savings account that may only earn a fraction of that.
But that’s the rub: Rates don’t stay high.
When you sign up for a high-yield savings account, you agree to a variable rate heavily tied to the current economy. In our example case, as inflation keeps cooling, APYs may go down.
Real estate traditionally has lower volatility, meaning returns stay on pace year-over-year. This is especially true with fractional real estate like Arrived, where you can spread your investment over several properties in multiple markets.
Consider tax implications
When you make any investment, you’ll likely end up paying taxes. In the case of high-yield savings accounts, interest income is taxed at your highest marginal tax rate. That could be more than 30% federal income taxes on every dollar, plus the potential for additional state income tax.
Plus, if you’re a high earner and live in a high-tax state, you could end up paying nearly 45% tax on interest income.
Taxes can be more complicated with real estate, but there are additional benefits. For one, dividends from rental income can benefit from depreciation, so you can defer some of the tax owed. Beyond that, appreciation is taxed at long-term capital gains rate, which currently sits at 15% for most people, half (or less) than the rate for interest income from high-yield savings accounts.
Arrived’s investment rental portfolio is held in real estate investment trusts (REITs). In addition to a host of other tax advantages, REITs are considered pass-through entities. In short, that means they don’t pay a corporate income tax (i.e. double taxation), and investors get to keep more of their money.
So, which is better?
When comparing the two vehicles, you may want to consider both. While a professional financial advisor can look at your situation individually and help you determine a plan to maximize your wealth, the general rule of thumb is to consider diversification. Or, to put it another way, don’t put all your eggs in one financial basket.
High-yield savings accounts are easy to open, offer nearly instant liquidity, and may outpace your traditional savings account on APY earnings. On the other hand, real estate typically provides stability and the potential for long-term gains (not to mention some appealing tax advantages).
By diversifying across several financial vehicles, you’re better positioned to mitigate some of the risks or downsides and maximize the benefits. However, remember that there is no one-size-fits-all approach when it comes to finance. Every financial situation is unique.
Interested in adding real estate to your portfolio? With Arrived, anyone can invest $100 to $15,000 per property in a range of single-family residential homes and vacation rentals across dozens of markets.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.