Frequently people saving money for a down payment, or for their emergency fund, feel that they need to find a way to speedup the process via methods that will generate more interest than a bank account or a CD. Once they have reached their goal they also feel that having the money sitting around not generating income is a missed opportunity.
All investments that aren't 100% safe introduce risk. To entice you to invest they offer the opportunity make more money than a bank account or CD. But the downside is that the extra money isn't guaranteed. In fact the introduced risk also opens up the investment to the possibility of losses, including a total loss.
You have identified risks with bank accounts and CDs. With the bank account you will generally lose money vs. inflation. With a CD the investment is less liquid if you sell early, or you want/need to sell 1/2 a CD, you will give up some of that extra income. Also if rates on a CD rise next month you are stilled locked into your current rate til the CD ends.
Putting some or all of the money you are saving for the house into a risky investment means that you may shorten or extend the time period. Nobody knows.
by investing in real estate we can offset the risk of real estate
going up in the next couple years: if real estate goes up we will
still be able to use our down payment for a comparable house as of
now. Inversely, if real estate goes down we will lose on the down
payment but be able to get a house cheaper.
Unless the REIT matches the market of residential real estate in your city/metropolitan region there is no guarantee that home prices in your city will move the same way the REIT does.
A recent listing of the 10 largest holdings of the index is:
- AMERICAN TOWER CORP
- SIMON PROPERTY GROUP
- CROWN CASTLE INTL CORP
- PUBLIC STORAGE
- WELLTOWER INC
- AVALONBAY COMMUNITIES
- EQUITY RESIDENTIAL
- WEYERHAEUSER CO
none of these tell me what home prices in my neighborhood will do next year.