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I can't get past the idea that, if you work well in your job, you may get laid off or fired, and companies do not like to hire you when you get past the age 45 or 50. But if you invest in some houses or rental properties or fixer-upper, a lot of people can do well and be financial independent. I don't like the idea of being a landlord (and dealing with tenants).

Why is this often positioned as the only (best) way to build wealth? Is it really?

Alex R
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nonopolarity
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    @NathanL This question doesn't ask about the risks of real estate investment, but plenty of other questions on the site do. – yoozer8 Sep 23 '19 at 20:03
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    I would like to invite users to join me in voting to reopen this question. We don't close questions because they have a mistaken premise that we don't agree with. Indeed, the OP is asking the question because he had heard something related to personal finance that he is unsure about. And he is certainly not alone in wondering about this. We now have 8 great, objective, well-supported answers that many people in the future will find insightful and helpful. This is exactly the kind of question and answers we want on our site. It is on-topic, not too broad, and not primarily opinion-based. – Ben Miller Sep 24 '19 at 13:52
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    I have opened a meta question to discuss whether or not this question should be reopened – Ben Miller Sep 24 '19 at 13:56
  • Please read The Intent and Purpose of Comments and comment only if you are requesting clarification from the OP. Note - the question has been edited, with a goal of reopening. Good work by Nathan, but this rendered most of the comments moot. – JTP - Apologise to Monica Sep 24 '19 at 16:37
  • Seem for whom? Do your claim is based on something you've read or heard in some random place? –  Sep 25 '19 at 12:07
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    (in a deleted comment) OP cites the book "Rich Dad, Poor Dad". The author made more money selling books and partnering with scam seminar offerings than in actual real estate. – JTP - Apologise to Monica Sep 25 '19 at 13:09
  • Land: they're not making it any more. – Paul D. Waite Sep 25 '19 at 15:10
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    Define "best". Creating a company like Amazon is a lot more profitable, if you can manage it. Working at the government is, in some countries, safer than owning real estate: the chances of getting laid off are lower than the chances of your two properties catching fire. Getting a job is cheaper than buying a house. Rationing your money and slowly spending it through the rest of your life has less management overhead than being a landlord. – GuilleOjeda Sep 25 '19 at 16:20
  • You assume that someone can actually invest in real estate. Tons of people can barely earn the money to get one house (where they live). You can't really invest in real estate if you cannot at least afford buying a second one as investment... so they would have to work almost their whole lifetime to buy a second one, then they would be at 50-60 or so of age and they have just one property that earns them something, not enough to live... – Bakuriu Sep 25 '19 at 21:23
  • because landlords are a protected class – cat Sep 26 '19 at 17:07
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    Not a real answer to your question, but in my experience...each and every time I've ever thought, 'Wow, why doesn't everyone just do X?' it was because I had a fundamental misunderstanding about X. The truth is that if X was objectively better, in anything remotely like a free market, more and more people would do X, until X was in alignment with other options. – Rob P. Sep 27 '19 at 06:13
  • @RobP. - interesting. Your comment reads like a note to myself, when I want to write a blog post, but just have a moment to jot down the premise. It's pretty insightful, and can be expanded in multiple directions. One of which, is that this is different from "what if everyone did this" in that even if just 5 units provided enough (it's wouldn't), that means that only 1 in 6 people can do this. But only 1/3 of people rent, so the analysis continues..... – JTP - Apologise to Monica Sep 27 '19 at 13:42

11 Answers11

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I think this might be an instance of "survivor bias" in that you only tend to hear from the people who were successful at it and made a lot of money off of it. Conversely you don't hear as much from the people who lost their shirt trying to flip a house or those who couldn't secure tenants at a good price.

If you're interested in the idea of passive real-estate investing (where you work with a property management firm who handles the purchase, upkeep and renting of your house and gets paid a fee from the proceeds) this article is pretty good.

But even the people who advocate for this approach make the point that you're probably only earning about 6% interest/year on your investment. At that rate I feel like you'd be better off just parking your cash in index funds and making ~10% per year with comparatively less risk.

Dugan
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    isn't it true that if the return is 6%, but if after 15, 20 years the houses double in price, then it becomes 12%, not to mention the gain on the house prices... by the way, which index is 10% per year? – nonopolarity Sep 23 '19 at 14:39
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    If you spend 100K on a house, and earn 6% from people renting it and then after 15 years the value of your house is 200K you will have earned ~239K which works out to about 8.2% per year. This also assumes that your house doesn't depreciate in value at all which is a gamble. The average total stock market return is 10% VTSAX tracks that index and has a low MER. – Dugan Sep 23 '19 at 14:59
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    Another downside of real estate is that it's not very liquid. If I want a bit of cash out of my mutual fund investments, I can just log in to my account, type a few keystrokes, and the money will be in my checking account in a couple of days. Compare that to trying to sell a house, or take out a loan on one. – jamesqf Sep 23 '19 at 18:16
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    Does this ~6% interest include the fact that you're taking out a mortgage and thus operate with a 5x-10x leverage? – JonathanReez Sep 23 '19 at 23:10
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    @JonathanReez Exactly, that $100k house costs you $20k of cash and some interest and cashflow. BUT, you need to have the ability to continuously come up with the cashflow. – quid Sep 23 '19 at 23:49
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    Over the last 20 years the average return on VTSAX is around 4.7%. If it were that easy to make 10% returns everyone would be doing it – A Simmons Sep 24 '19 at 12:43
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    @A Simmons. VTSAX tracks the total stock market index. The historical trend of the stock market from 1926 through 2018 has been 10% growth per year (even though VTSAX hasn't been around that long). Your 4.7% estimate ignores dividend payments and nicely brackets the 2008 financial crisis. This will give you a better estimate -- 100 year trend sees 10.2% growth per year (with dividends reinvested). – Dugan Sep 24 '19 at 14:12
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    @nopole Don't forget maintenance costs. The house might appreciate by X but you will have to spend Y on it over that time period. – user1723699 Sep 24 '19 at 14:35
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    @dugan even a 1000 year trend is not a good indicator of future performances. The market is not the same as it was 100 years ago. If VTSAX only average 3% over the last 20 years, what makes you think you could extract 10% yield out of it in the coming years ??? – Hoki Sep 25 '19 at 09:13
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    @Hoki Two points: (1) VTSAX averaged 7.7% per year since its inception in 2001 which includes the 2008 financial crisis. It averaged 14.7% per year over the last 10 years since then. A lot higher than the 3% you mentioned. (2) Statistically it's the safest bet. It regularly beats the majority of managed funds over the long-term. If you think that you're significantly better at picking winners compared to professional financial planners then go for it. While I can't guarantee VTSAX is going to return 10% in the future it's a pretty safe bet that it's going to be one of the best investments. – Dugan Sep 25 '19 at 13:50
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    @Hoki Betting on individual stocks is a bit like going to the Casino and gambling. Betting on VTSAX is like betting that the Casino is going to make money in the long-term. (with the added wrinkle that if the Casino/stock market completely collapses the concept of money is basically irrelevant). – Dugan Sep 25 '19 at 13:53
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    The discussion here alludes to what I think is perhaps a deeper "fundamental" point: if capitalism is working properly, in theory all things have a return exactly proportional to the risk taken on. This is of course not fully true all the time, and people can find specific areas where they have an advantage (e.g. if you enjoy fixing houses, then you're getting paid to do something you don't consider "work"), but it explains in general that you cannot just "go into real estate" and expect better success on average than tossing your money into ETF/REIT/etc... – mbrig Sep 25 '19 at 20:44
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    @Dugan "1926 through 2018 has been 10% growth per year" -- Since 1926 the US stock market represented the capital stock of the winner of 2 world wars; the first of which it won and was the only intact major industrial power in the world, the second it won while building a globe-spanning empire. During this period, the global oil industrial revolution has climaxed, and the information technological revolution started. If you can arrange for all that to happen in the next century, your projection of continued 10% ROI may happen. – Yakk Sep 26 '19 at 14:30
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    @Yakk. You may be interested in reading "Time Machine and the future returns for stocks" for insight into a 40 year window that saw a lot of tumultuous changes in the US economy where the S&P still showed 12% growth. While there's no guarantee that the economy is going to continue to grow by 10% every year I can't see a better/safer bet to make. – Dugan Sep 26 '19 at 14:50
  • @Dugan Yes, that is the period in which the USA won the second of the two world wars, the oil industrial revolution climaxed, and the information industrial revolution really took off. As noted, if you think in the next 40 years the USA is going to win another WW2/ColdWar scale clash of civilizations relatively undamaged and the information tech revolution matches the climax of the oil revolution and another industrial revolution the equal in size kicks off, then yes, you can expect another 10% growth over 40 year period. It is a possible situation. – Yakk Sep 26 '19 at 15:00
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    @Yak -- The article I attached looks at the period from 1975-2015. WWII ended in 1945. The 40 year period I'm referencing includes Black Monday, the tech bubble of the 90's, September 11, and the housing market crash. There will always be ups and downs over time. The bet that I'm making by investing in index funds is that in general the world keeps getting better, more innovative and more efficient over the long-term. If you disagree with that assertion, or you think you're a more savvy investor than 90% of active managers you should probably keep your money somewhere else. – Dugan Sep 26 '19 at 15:15
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    @Dugan The cold war ended in the 80s; the USA won, and got a huge dividend. The "tech bubble" was the flowering of an information-based industrial revolution, based in the USA. The oil industrial revolution continued to issue dividends over this period. The bet on investing on index funds is that you pick the country which wins the next few competitions; the USA has won like crazy for 100 years. If you think it will win for the next 40, then bet on the USA by buying US index funds. I'm not saying this cannot happen, I'm saying what is needed to get 10% returns for 40 years. – Yakk Sep 26 '19 at 15:33
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    I find it sad that the majority of people here who are commenting on the downsides of real estate investing are not investors themselves. Yes, you can get into real estate and lose money, break even or gain a small gain. That's because the "investor" was ill informed and was just winging it. As someone who has studied real estate investing and seen the process myself, which is repeatable and incredibly profitable if you learn before you act, I find it absurd that people are giving advice on something they do not understand. Sure, a novice should not just jump in, but this is not good advice. – Jonast92 May 28 '20 at 16:31
  • "But even the people who advocate for this approach make the point that you're probably only earning about 6% interest/year on your investment. At that rate I feel like you'd be better off just parking your cash in index funds and making ~10% per year with comparatively less risk." Investors who study before they invest are making 12-30%+ (sometimes infinite) returns per year in the form of liquid cash in their pockets. That's not including the mortgage pay-down of their property, the property appreciation or tax benefits. – Jonast92 May 28 '20 at 16:34
  • @Jonast92 The original question that everyone is responding to was essentially whether real estate investing is the best way to make money, without regard to the posters knowledge or skill in that area. Sure, if you know what you're doing and are willing to put in the work, real estate investing can be very profitable. But you could say that about many industries. The point that I and others are making is, If you think you can just buy a rental property and sit back and cash the checks while sitting by your swimming pool doing nothing, no, that's not how real life works. – Jay Sep 15 '20 at 14:02
  • @Jay As a real estate investor myself, I am fully aware of that. That being said, you can read 20 books on real estate investing and gain enough knowledge to become a millionaire within a few years of doing so. Good luck becoming a millionaire through stocks within a few of years even after reading 100 books using the same initial investment. – Jonast92 Sep 15 '20 at 14:04
  • @Jonast92 I was a real estate investor myself and I lost a bundle. I didn't read 100 books. Perhaps if I had read the right book I would have cried, "Zounds! This is what I'm doing wrong!" and gone on to make a million dollars. Or maybe not, maybe I could read 100 books and still not have the skill to do it right. If you reply, "Well, if you lost money, you must have been doing it wrong", yes, obviously so. I certainly agree that one is unlikely to turn a modest investment into a million dollars on the stock market. My point is not that real estate is a bad business to get into. ... – Jay Sep 15 '20 at 14:41
  • My point is that one shouldn't think that it's a road to easy money. If you know what you're doing, you're willing to work hard, and you have a little luck, I'm sure you can make a fortune. But if you think you're just going to run out and buy a rental property and then sit back and collect the checks, that's not going to happen. That's all I'm saying. – Jay Sep 15 '20 at 14:42
  • @Dugan I was not alive in 1926, and might retire just after the future version of the dot com bust. – RonJohn Sep 12 '22 at 21:13
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What is the truth about this?

Pretty much no truth.

At 48 years old, I received an offer for a job where I was paid far more than any other employment I had previously. I chose it over two other competing job offers that were offered at a very similar time.

While I was laid off from that job, rather abruptly, I had a new job within a short time at age 52. About four weeks from the start of job search to my first day. The important part was I had sufficient savings to cover this emergency. Shortly after that, I also picked up some part time work that allows me to replicate the salary made at the former position. Additionally most of the people I work with, are newly hired and older than I.

Historically most people earn the most in their 50's and 60's as they have become experts in their field. That is the normal. Also is that if they lived a somewhat frugal life style they have a paid off home and cars (no debt), or a very large savings balance (like over 1 million). Some people were savvy enough to obtain both. Those in really good shape, financially, might welcome the layoff!

Keep in mind, that being laid off by a company, after a long history does not include the same harm that it once did. When pensions were very common it might mean a drastic decrease in retirement income. However, with 401Ks and the like it does not matter as much. If you are able to market yourself well, a lay off may mean a raise!

Sure there are stories of those being laid off and unable to find new work, but there could be reasons for this. Did they stay up on the latest technology? Are they willing to make less then the job they were laid off from? Are they part of a dying industry? Is their job function subject to automation?

Real estate is a business, like any other. It requires skill and knowledge. Profits are not guaranteed. In fact a highly leveraged real estate business with little experience is very likely to lead to bankruptcy. The same could be true if one opens up a clothing store, pizza place, or auto repair shop.

Leverage devours income. Inexperience leads to mistakes that also decreases income. The combination of the two are deadly to business solvency.

Pete B.
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    i think your case may be a special case. Some people say, if they can hire 25 or 28 year old, why would they hire 45 year old? But I think it depends on the field also. In software engineer field, people who have 15, 20 years of experience may not know the tech that is the latest 5 years which is the most relevant, and the companies need people to work 10 or 12 hours per day, or even sometimes Saturday, and they know the 25, 28 year old have more energy to do it and is more willing to do it (the 45 or 50 year old may oppose it)... – nonopolarity Sep 24 '19 at 01:50
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    "Knowing the tech" is the biggest misconception in the job market. People who "know the tech" don't necessarily make good worker. A business is driven by business needs. Tech people need to know business and understand concepts like ROI, Cost/Profit center work, asset depreciation, etc. How many companies successfully jumped on to the blockchain band wagon? Agile? Scrum? NoSQL? (there are over 200 versions by the way) The super mess of JS frameworks (Angular, Express, Node, React, etc, etc, etc.) – Nelson Sep 24 '19 at 02:05
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    With newer Programming Languages and Frameworks, learning the syntax of a new language and writing runnable code gets easier every day. But more important than ever writing code which does the right thing in respect to actual business requirements needs a lot of experience and a good overview over everything which is connected to your piece of code. I'd take a bright 50 year old at 35hrs over an eager but inexperienced 25 year old at 50hrs every time when it comes to business critical work. – Falco Sep 24 '19 at 09:51
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    @Falco while many many programmers mentioned they feel they are outdated quickly, you seem to have a different view. It is not simple as the "syntax" of a new language. It is more about using jQuery, and all of a sudden, companies are using Backbone.js and/or Ember.js, and then AngularJS 1.0, and/or ReactJS, and then Angular 8 and/or vue.js. It changes quite fast, and my past experience was, it doesn't matter how great you were. Some companies just want to hire the person to "hit the ground running", and if you don't have at least 1 year experience of ReactJS, they simply say no – nonopolarity Sep 24 '19 at 10:16
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    @nopole what is the difference between a 28 year old and a 45 year? The average tenure for tech is about 5 years. Its salary. If that 45 year old is willing to be paid only slightly more than the 28 year old, he will have no trouble finding work. If he wants years of compounding raises included in his salary, then he might not. – Pete B. Sep 24 '19 at 10:28
  • @PeteB. I think there are several things: (1) if your manager is 32 year old, he wouldn't want to hire people older than him (or much older than him). People may seem more senior than him or not listen to him so well (2) when you are age 25 or 28, you can stay overnight or work 12 hours a day. Many people I know say, when they are past 45 or 50, they cannot stay up all night like before (3) people who are 25 or 28 may listen to the management and obey more, while people who are 45 or 50 may have too much of their own opinion... these, people say it is unwritten rule, and won't say or admit it – nonopolarity Sep 24 '19 at 10:50
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    @nopole I'm 33 and I just staffed my team with some experienced seniors last year. - I never worked overnight or 12 hours on a job, because I value a sustainable pace over crunch (it is even forbidden by law in Germany to do so) - and I already had to manage some young hotheads which did a lot of stupid stuff, while older colleagues usually knew how the chain of command works and followed it even when I was half their age. – Falco Sep 24 '19 at 11:23
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    Bootom Line: Both our experiences are very anecdotal and not really backed by current statistics, and certainly different for each country/city and sector (even in tech gaming, fintech, consulting are totally different work environments). - Overall there is no clear cut line, if you are good at your job and your skills are in demand you will almost always find work easily. If your skills or way of work is not in vogue and you have a hard time with change and don't accept a pay cut, chances are you will find it difficult. – Falco Sep 24 '19 at 11:27
  • @Falco yes it is anecdotal, and the culture is different even if it is Los Angeles vs Silicon Valley. I even watched in a TV program that in Germany, if you pick up the phone and not say your name, it is considered to be impolite, while in USA, nobody ever does that. I also watched that in Italy or in Brazil, it may be expected you only work 3, 4 hours a day and if you are into working, people see you as "weird". Even if it is the same country, people also have a phrase in Asia, "different occupations, the culture and rules like a few mountains apart." – nonopolarity Sep 24 '19 at 11:52
  • @Falco I also can imagine, in Germany, could it be that many people do things because it is proper or correct, and in some cultures or regions, people may be more of "self-interest": they won't necessarily do the proper thing, but rather, do the things that are most beneficial to themselves, so what they do might be different from what is happening in Germany – nonopolarity Sep 24 '19 at 12:45
  • In many, many countries people into their 50s and 60s are being laid off so their company doesn't have to pay a pension. So you're wrong in general Pete B. And worse, in tech people's earnings tend to peak around 40. So doubly wrong. That's not to say I recommend real estate as a financial plan, but this analysis of salary is at least 20 years out of date –  Sep 25 '19 at 00:15
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    @GeorgeM and also in many countries companies do not have to pay pensions at all, because the government does. And what's more you have to pay people you let go a severence package, which is proportional to the amount of years they have been in your company. So sometimes it is even cheaper to keep someone another 2 years on the payroll, until he transitions into retirement (no severance pay) than to fire him and pay him the big severance package. - as I said different location different rules ;-) – Falco Sep 25 '19 at 08:21
  • @Falco, sure, nice theory. But in France for instance, where all that you say applies, companies are doubly intent on getting rid of anyone who's approaching 50. And it's basically impossible to get another job then. I'm pretty sure it's not the only country where that applies. As I mentioned, this is not 20 years ago any more.. –  Sep 25 '19 at 17:12
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    @nopole You just described why 90% of tech startups fail. – StackOverthrow Sep 25 '19 at 19:29
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    @GeorgeM as I said before, it is not just a theory, I work in the sector here on Germany and I have seen this happen and done it myself. It's anecdotal evidence, just like your examples, unless you can provide a scientific study for your claim. If not I will stay with "It depends and can go either way depending on City and line of work" – Falco Sep 25 '19 at 21:42
  • Ha ha ha! OK, let's see your scientific study then? –  Sep 26 '19 at 01:43
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    @nopole : I've interviewed developers, so the concept of "knowing the latest fads in tech, but nothing else" is known to me. Candidates who think they are genius programmers, but programming from them only means downloading a bunch of libraries, and their program only consists of calling them, while they couldn't write a program to find the longest series of consecutive '0' characters in a string, given half a workday. – vsz Sep 26 '19 at 11:59
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Several other good answers that get into the details, but I think there are a few obvious things that need to be said here:

  • Real estate isn't a risk-free golden ticket - investing in real estate involves a lot of risk. It's easy to fail at it, and then you have nothing to fall back on.
  • Having a career with a skilled job isn't as dismal as you've made it out to be - If you've worked at a skill for a long time, you will be marketable. Assets (real estate) can always be lost or devalued, but if you know how to work, you can always earn money.
  • People who write books or promote income strategies are usually better experts at selling themselves than they are at the thing they're trying to sell - people who hold real estate investment seminars, or write books about investing in real estate, are trying to sell seminars and books. A best selling book is a best selling book. It may or may not reflect any value in terms of you making money.
  • What matters most is having a strategy, understanding the risks you're taking on, and making good decisions with your resources. In a comment, you mention that 50% of Californians do not have a retirement fund. This is because they did not decide to have one. It doesn't mean that "normal" jobs like being an engineer are a bad way to build wealth.

Let that last point sink in for a minute. It doesn't matter if your money comes from a salary for being an engineer, or rent from being a landlord, or from selling hot dogs at the stadium. What matters the most is making good decisions about how you spend or invest your money. Jobs or investments are just means to an end.

To be blunt, the answer to your question of,

Why does it seem the best way to make a living is to invest in real estate?

is: because you're not looking at the whole picture.

dwizum
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    +1 especially for mentioning the risks. Many underestimate the problems with evicting nonpaying tenants. Depending on the jurisdiction, it can take a long time. Especially if the tenant has small children, is pregnant, has a chronic illness, or is a member of a protected minority. You might lose several months or years worth of rent, and lawyer's fees you will never get back if your tenants are unemployed. And even if you win, you might be unlucky and be featured in the news (or on a viral social media post) as the heartless greedy scum who put that poor starving family on the streets. – vsz Sep 24 '19 at 06:20
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    @vsz I would never be a landlord. The amount of redtape and fine print you have to be aware of is ludicrous. I recently got a taste of it when I asked my landlord for something and the amount of bureaucracy was so ridiculous I really felt for him. – Magisch Sep 24 '19 at 08:34
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    If you've worked at a skill for a long time, you will be marketable... if you know how to work, you can always earn money.

    That's overstating it a bit; it depends on your career. There are plenty of historical examples of skilled careers that have become near-redundant in a short space of time. Steelworkers, for example, or coal miners. However, I don't disagree with the general point.

     – K. Morgan Sep 24 '19 at 12:19
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    @K.Morgan I appreciate your comment. The OP seemed focused on real estate being good because it means you own an asset. The point I was trying to make is that the ability and skills needed to work is a powerful asset that should not be overlooked. I agree, there are many skills that have become less relevant over time. – dwizum Sep 24 '19 at 13:02
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    Upvoted for the risk. I know many people that are landlords who just DON'T understand the risks they are running. – Arluin Sep 26 '19 at 15:56
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The sales pitch:

A few decades ago, I had a friend that was starting out in real estate investing. He explained his reasoning like this:

  1. Buy a starter home. Get a decent house/condo with the best rates because it is an owner occupied purchase. Live there for 5 years.
  2. Buy another house, get some renters lined up for the first place. Renters cover the mortgage on the first house, you buy another slightly nicer place.
  3. Rinse and repeat.

The idea here was that the renters pay all the mortgages, and after 30 years you own the house outright, so the rent becomes residual income. So for the average Joe without a pile of investment capital, this is the way to create wealth. A little bit of borrowed money here and there, and it multiplies with itself. What could go wrong?

Mugged by reality:

Good renters are good. Bad renters are... a nightmare. Roll the dice, do your due diligence, but at the end of the day, the people you do business with can be a huge liability. Can you afford to cover two (or more) mortgages, repairs, etc., during and after a protracted legal battle to evict a bad tenant?

What about a recession? What if you lose your job? What if your tenants lose their jobs? What if rents go down? What if the real estate market collapses a la 2008? What if tenants stop paying because there is an eviction moratorium during a global pandemic?

What Pete was explaining about leverage is this problem that if you borrow money from someone else, they expect you to pay it back (mortgage payments) and though they may be sympathetic that your renters aren't paying you the money they owe you, at the end of the day they're going to repossess your property and ruin your credit rating if you can't keep making the payments. Borrowed money always comes with risks. Investing in real estate isn't a silver bullet that will magically make you rich.

It works for some people, but it is a second job to be a landlord. If you want a second job, there might be easier side-hustles out there, but this may be the one for you.

It isn't all doom and gloom

I painted the bleak picture above because things can go very wrong. I don't like being a landlord, so I generally avoid it, but I've done it a few times for a few years while waiting for the real estate market to change before selling a property. The one tip I'll offer: if you want the best tenants, you might be better to ask slightly below the market rates for rent so that you get a large number of applications (which puts you in a position to choose the most stable tenants from the list).

NL - Apologize to Monica
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    +1 to eviction difficulties. This can be a particular nightmare in socialist-leaning jurisdictions like Canada which strongly favor renters rights. – JonathanReez Sep 23 '19 at 23:12
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    @JonathanReez As someone born into a „socialist“ east block country I can assure you that Canada is neither socialist nor „socialist-leaning“. – lejonet Sep 24 '19 at 10:29
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    In Japan, owners usually require tenants to pay an insurance company (保証会社) at the beginning of the contract. Later, if the tenant don't pay, the company does it and should handle the hassle. (as a tenant, I hate paying this company but it's quite mandatory if I want to live somewhere) – None Sep 24 '19 at 13:00
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    @lejonet not sure about definitions, but at least in BC you can't even give notice to a tenant without a good reason and it could easily take a year to kick out a non paying tenant. Absolutely awful for landlords. – JonathanReez Sep 24 '19 at 16:14
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    @JonathanReez This might be the case, but still doesn’t equal „socialism“. – lejonet Sep 24 '19 at 16:32
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    A lot of people think that getting enough rent to cover the mortgage+ and the probable increase in the value will be nice. A lot of people don't realize until its too late that you have to pay taxes not only on the capital gains on the increase in the house value, but also for all of the depreciation that you should have claimed while renting (whether you did or didn't claim it! [in the US]). This can pop you up into the next tax bracket and you'll end up with less money than you needed from the sale. – Arluin Sep 26 '19 at 16:00
  • "if you borrow money from someone else, they expect you to pay it back" Yes, banks can be very narrow-minded that way. I've tried to explain to them the folly of a life so tied to material things. I offered to read them some of my poems and teach them meditate and reach enlightenment ... but they still wanted the cash. :-) – Jay Oct 15 '19 at 19:42
  • yes, recently, I have thought about... instead of investing in 2 or 3 houses and "act" as a landlord to run the business, why don't I invest in some smart and stable companies and let them do the details? Invest in Apple, or GE, or Wells Fargo, or Google... so that they do the work of running their business... if it is too risky, maybe I can buy Apple and Google and also buy some put options, or inverse-index ETF of tech stocks (or PSQ), to protect against any drop – nonopolarity Jan 22 '21 at 08:07
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No. You have an overly pessimistic view of holding a job, an overly optimistic view of real estate investment, and you don't even mention other alternatives.

Sure, you could get laid off from your job. That's stressful, but it's hardly the end of your life. Get another job. If you have marketable skills, this can be quite easy. I was fired once, and I got another job in about 2 months. I've never been laid off but I did once quit a job because the company was going bankrupt and it was obvious that a layoff was coming. I've gone through, let's see, 10 jobs in my life. I started my current job when I was 53, so it's hardly impossible to find a job after 45.

Some people make a bundle out of real estate. Others lose a bundle. I used to own a rental property as a sideline to my day job. I lost money on it every year until I finally bailed out and sold the property. I lost money every. single. year. It is not the magic money maker that some people seem to think. I've seen lots of discussion on this forum and elsewhere where someone calculates how much he'll make on a rental property that are wildly optimistic because they make very questionable assumptions. They assume that they will always have a tenant -- that they'll never, ever have a time when someone moves out and they don't have a new tenant moving in the next day. In real life, it can take months to get a new tenant. They assume the tenant will always pay the rent. In real life, it's not at all uncommon to get tenants who don't pay, and then you have to go through the eviction process. They make very low estimates of maintenance costs. If you are a skilled carpenter, electrician, and plumber and you can do all the maintenance yourself, and your time is worth nothing, maybe some of these estimates are plausible. But if you have to pay professionals, well, I think I'd get sick to my stomach looking at what I had to spend on maintenance. Etc.

What about other money making opportunities? There are many kinds of business that you could start besides a rental business. What about starting a laundromat, a law firm, a dog-walking service, a aircraft factory, etc, for thousands of other possibilities?

On your philosophical comment, "So the meaning of life is being a landlord (and dealing with tenants)? It seems like it will make life lose all its meanings." Even if it was true that being a landlord is the secret to financial success, you seem to be confusing "best way to make money" with "the meaning of life". The meaning of life is to get right with God, live for his glory, and enjoy his blessings. Yes, you have to make money to survive, and it's good if you can enjoy your work and get some satisfaction from it. But that's not the meaning of life. You need shoes to walk around, but that doesn't mean that the only reason you walk around is to get new shoes. Okay, I'm sure others on here will disagree with me about the meaning of life, but I suspect that few will say that it is make money.

Jay
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I get the appeal of real estate investing and it is a big part of my retirement strategy. I like owning property because it is a thing I can go and interact with, it feels more permanent and real than the numbers in my retirement/brokerage accounts.

The fact is, though, plenty of people retire happily owning no investment properties. Being prepared for retirement is more about a lifetime of living below your means and investing prudently.

As far as investment performance goes, real estate results vary wildly. I believe that with adequate preparation and capital you can achieve fantastic results, but I would not suggest that it's the right fit for everyone. I'm a DIY type who enjoys fixing things up, so handling things myself makes being a landlord a part-time job in addition to my full time job. Perhaps I'd be making more if I sold the rentals, invested that all in the stock market and delivered pizzas part-time, who knows. Plenty of people have lost significant money on real estate investments, it is not a guaranteed path to wealth. There are nightmare tenants and declining housing markets that can financially ruin you. There is potential in real estate, and there's also a lot of competition/risk, don't believe anyone who pitches a bulletproof investment strategy.

Hart CO
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What is the truth about this?

Only partial truth. Investing in real estate is a bad idea for many reasons:

  • Houses depreciate at the same time housing market appreciates. If you buy a house that is 20 years old, 100 years from now it will be 120 years old. Probably old enough to be demolished. Housing market appreciation happens because it's the market average; i.e. if average house is 35 years old, it will probably be still 35 years old 100 years from now. So, it's possible for the housing market as a whole to appreciate and individual houses to depreciate.

  • Houses require maintenance & repairs. Did you include the cost of maintenance & repairs in your calculations?

  • Diversification is poor. One poor tenant, and you will lose a lot of money.

  • Return is poor compared to the risk. For example, between 1778-1779 and 1814-1815 housing market in Amsterdam crashed 80% (the source for house prices is inaccessible now[1] but even rents decreased: http://www.stefanstraetmans.com/attachments/File/housingeconomics.pdf) -- it's about the same you would have lost in Great Depression if investing to stock market. So, risk is the same as it's for stocks. Return is worse.

However, investing (but not necessarily in real estate) is a good idea.

Invest your money into where the risk/return ratio is the best: stocks. Stocks for the long run!

[1] It used to be here: http://pub.maastrichtuniversity.nl/cda347a3-7fdf-426e-99a4-1a2c30717764

At least from my university, I can access https://onlinelibrary.wiley.com/doi/pdf/10.1111/1540-6229.00711 ...not sure if it's accessible outside of universities.

juhist
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    Your [1] appears to be available from https://web.archive.org/web/20150822031955/http://pub.maastrichtuniversity.nl/cda347a3-7fdf-426e-99a4-1a2c30717764 – user Sep 24 '19 at 13:34
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    "Probably old enough to be demolished." The oldest house I lived in was at least 170 years old, and I expect it to be largely intact in another 100 years. At least in the UK houses essentially never decline in value (provided they are kept maintained). – Martin Bonner supports Monica Sep 26 '19 at 14:39
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"Why is this positioned as the only (best) way to build wealth?"

Because it's sold and marketed that way - various parties stand to gain a lot by you investing in property - essentially they can take their slice of the pie with minimal exposure while you shoulder most of the risk. But, the success stories are real because the real estate game provides easy access to Leverage (which if used responsibly can provide large amounts of profit for the risk-taker). Add some fancy asset inflation due to easy credit and the whole thing looks undeniably great.

"Is it really (the best way to build wealth?)"

No, just one of many different ways. In Australia (my residency) the space is 'crowded' and a lot of the value is already milked out by the banks providing finance and government imposing taxes but as already mentioned above there is still room for a savvy investor. Anyone considering this space should educate themselves on all aspects of tax implications, hidden fees, insurances, building certificates, etc. But don't fool yourself to think that over-leveraging yourself is a sure path to success, or that negative gearing is a divine thing, or that 'passive income' comes about at no-one else's expense.

Finally it's worth noting the landlord group effectively profit from a class of folk who don't have access to Leverage so there is a moral imperative which is often ignored by the spruiker (YMMV).

Sid James
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  • Can you elaborate on the last paragraph. E.g. on the moral imperative? – Peter Mortensen Sep 25 '19 at 20:42
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    elaboration: Bidding on housing stock keeps prices out of reach for those with no access to Leverage, so a large property portfolio helps continue that situation. You need to be happy with the modern feudal system, knowing the game involves co-opting the productivity of others to increase your profit margins. Because most of us don't know anything different, this arrangement is socially acceptable by all parties, but it is not necessarily healthy for society. – Sid James Sep 25 '19 at 22:45
  • "Bidding on housing stock keeps prices out of reach for those with no access to Leverage, so a large property portfolio helps continue that situation" This is nowhere near the only reason people rent. This might be the reason some people rent long term, but it's not the only reason people rent. – Stephen Sep 26 '19 at 05:40
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    @Stephen - I agree, and mine is too broad a comment to paint the entire housing market. However it must still be compared to our parents day when it was possible to pay off an entire house in a three year time-frame. So it becomes just a discussion about percentages of affected. – Sid James Sep 26 '19 at 09:34
  • @SidJames Yeah that's true, it was. But then again those houses were asbestos clad, not insulated and were built in a time where the unskilled labour market was huge (reducing the cost of construction). Now we have a more educated population who want huge houses with twice the number of people living in our capital cities. We've seen divorce rates skyrocket and birth rates plummet so there are more bedrooms per person than ever before. There are so many more factors to the housing market than negative gearing. – Stephen Oct 15 '19 at 22:58
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The thing with property, is like any other portfolio, you ought to diversify. And most people can't afford to diversify when they start in real estate.

Real estate investments can be good. I sold an apartment that had been paid for entirely with the bank's money, whose interest and other costs had been paid by the same renters from day 1 (and who decorated!) and the tax free[1] profit was more than my gross income from my day job for the year.

They can also be bad. I have another apartment that has cost me over 30% of the purchase price in repairs. It has only recently become profitable, and while unprofitable it was unsellable at anything close to a reasonable price. The temporary losses didn't break us, because we were getting income from the other rental.

So, diversify. If you can't afford to diversify, you are taking a huge risk. And few housing markets have had a sustained boom like my city, so huge capital gains are far from guaranteed.

[1] There is no capital gains tax in my country.

Rupert Morrish
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  • There is no capital gain in real estate or even stock in your country? Do you mind telling which country can have this benefit or maybe just the continent? – nonopolarity Sep 24 '19 at 05:33
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    I live in New Zealand. Not sure about stocks but the bright line for real estate is if you hold it less than two years it's taxed as income, otherwise it's capital gains and tax free. – Rupert Morrish Sep 24 '19 at 05:39
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Sorry, this isn't really an answer. I don't have time or space to enter all of my experience in investing in different ways. I have been a landlord, hated it. I got out of it at a small loss. Had one or two good tenants, had 3 bad to horrendous tenants (the last one failed to pay me, ever, and then when finally legally evicted ripped out all of the drywall, stole all the appliances, and even the storm door!

The best I can recommend is to attend seminars (and keep your wallet in your pocket, and your hand on your pocket the entire time!). Attend flipping and real estate investing seminars, attend those dinner and a pitch seminars from fiduciary wealth management advisers. Always be skeptical; the better it sounds, the more likely it is a scam. Get books from the library and read. Wait until you have a few score of these in your history. Then start interviewing fiduciary advisers to find one you are comfortable working with, that you think, based on your new-built experience, will do a good job. Then, if you feel like doing the rental thing, get their advice. They'll point out the risks, and if you are able to absorb those risks.

Also, of course, post your ideas on Reddit and let your friends poke holes in them! It's better to know where the pitfalls may be than to go in with a blind spot.

Arluin
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Think of real estate as an investment like stocks. However unlike stocks, which is more akin to gambling and luck, there are 2 main differences.

  1. Real estate is more of a skill than just gambling. You're not just picking it and watching a stock ticker. There are skills to picking properties, flipping them, land lording aka property management.

  2. There are special incentives by the government that let you get a leg up. For example, as a first time home buyer, you can get maybe a FHA or VA loan with very low money down, then live in the unit and rent out most of the rooms. This is something called "House Hacking" in the Bigger Pockets community. So imagine being able to buy $100,000 of really safe stocks that provide a good dividend with just $3,500. That is something you can do with a house but not with the stock market, because the government allows special loans for property because they want people to become home owners. You can do this for about 10 convention loans per person. And if you can get to 10, you're usually addicted and skilled and networked enough to keep going and find other ways to finance it. Also, the house is collaterol that they can take back. To get a loan to buy some stocks, you'd have to get a personal loan at a much higher interest rate and maybe have to put something up as collaterol. Because if you just buy stocks with it and the stocks go to zero, then the bank has nothing they can repossess. You can buy stocks on margin but that is very risky and doesn't have government benefits for that kind of a loan.

Dan Csharpster
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