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There is a mythology around real estate investing for two reasons. One, it’s something people can understand. You buy a building, and get rent. They played Monopoly, so they understand the concept. The other reason is that hucksters and con-men tout their books and courses on TV and radio ( Trump University, anyone? ). Those books make money for the authors, no one else. In contrast, index funds require a certain amount of education, and involve the stock market, which many don’t understand, or else have been burned by different stock market hucksters on TV.
But real estate deals either have middle men, taking up too much profit, and also suffer from a lack of diversification, or can be outright scams. There’s no free lunch. Buying real estate is like buying an individual stock. Someone’s 12% return is balanced out by someone else’s 6% return, or 10% loss. Unless you really know what you’re doing, you’re setting yourself up for failure.
Sometimes you hear of good deals. Now, I know that sometimes that $20 bill on the floor is really a $20 bill, but if it’s a real $20 bill, why is someone telling me about it? Why don’t they just pick it up themselves? There’s usually a reason why the broker isn’t just buying this great property and a low price themselves. I’m not getting the full story.
I have some real estate experience with a small commercial property that my parents own. It’s been theirs for over 60 years, owned free and clear, with a long-term tenant now and a triple-net lease, cap rate around 7%, I think. But the rent is sometimes late, and we have to make sure that the insurance and taxes get paid, and personally, I would rather have more index funds. It earns more long-term. If the economy drops so will the rent payments. It hasn’t been without problems. About 30 years ago there was a fire and it was vacant for a couple of years. Despite that, my mother loves the rental property. She gets a check every month, and she spends it. Even though her 401k and taxable account continue to grow, she doesn’t understand them and she doesn’t fully trust them But even when it’s late, she understands the rent check.
I have been offered a few properties to develop ( single family homes: tear downs to rebuild ). You can make money on these, but you can also lose. For example, I live in a crazy expensive Bay Area neighborhood. A house was bought two blocks from me at the absolute peak of the real estate boom 10 years ago. It was a small odd shaped lot on a busy corner. I argued with a contractor friend, saying that I wouldn’t take if for free, as I would not be able to build and make money. It sold, was torn down, then they ran out of money and were foreclosed on. Then another buyer was foreclosed on. It took 9 years before a new buyer finally finished it. They just had an open house, trying to sell the finished house. It’s been 2 weeks and it hasn’t sold. Houses here usually sell in 2 days. The agent told me what they paid for the house and what it cost to build. If they get the asking price soon, they will make a small profit. If it doesn’t sell soon, they will lose money, not even counting sweat equity costs. My point: You can lose money on real estate, even if you think you know what you’re doing and don’t get cheated. No thanks.
You can definitely lose in property investment. But I think direct property buy and hold is considerably better odds than direct individual stocks. I've bought about 10 properties and sold 7 and none of them at a loss. I've bought a lot of stocks and sold at a loss and even one or 2 that went to zero.
The problem (or advantage depending how you look at it) with property is that it often is quite concentrated and undiversified.
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