I have toyed with the idea of owning rental property. My conclusion was that once management/taxes/upkeep taken into account the residual returns are the same or lower than broad equity in risk adjusted terms. My main gripe is that you are buying X properties with a variety of idiosyncratic risks, a lot of which you can not mitigate. Location is one - you buy a place and next thing you know the city decides to build a garbage processing plant next door. Or, for example, my apartment is in a building with the dumbest condo board in Manhattan and keeps bleeding money. So if you want exposure to various forms of real estate, the REITs market is there for you. There are exceptions to this, probably, but they require some real value-added from the investor. Like a handy guy can try buying distressed properties and renovating them.
It solely depends on the person. Each require specialized knowledge, a learning curve to achieve it, and a commitment to succeed to weather the countless things one did not anticipate. In real estate, money easily flows to well structured transactions created by the well-informed. Property on the path of development will appreciate magnitudes above properties that are not. Distressed properties have a higher money velocity to the above. Creating, buying and selling paper have even higher money velocity. A couple of common mantras; Flip until you can sleep, then keep. You make your money when you buy and get paid when you sell. Ugly houses, pretty houses, deals on wheels, trading paper or commercial deals. Each is a specialty and require focus to find the one thing that makes or breaks a deal - the motivated counter-party. Edit: With all that said, I never woken up to property value disappearing overnight but have to companies declaring bankruptcy while long the stock. In contrast, I’ve never woken up to property value doubling but have to afterhours news favorable to whatever current positions being held.
the same advice goes for a company hiring employees. leave a position vacant until you find the excellence you are looking for.
I almost pulled the trigger on buying some income properties last year but backed out. I felt it was too much work for a 10% return on investment. I can do better than that in my stock investing for sure. The investment properties in my area are usually old and decrepit with deferred maintenance and improvements involved which would probably reduce the long term ROI to 6% or so. And after you pay Uncle Sam you'd be barely ahead of inflation.
You want to purchase multifamily buildings in areas with brisk economic growth and reasonable valuations (typically in red states). Then find quality tenants, and be prepared to roll up your sleeves. Good luck.
One thing with stocks is it can dip by upto 100%. That's not true with real estate. You can have bad tenants or even no tenants for few months. Real estate can also be a "headache" to get rid off unlike stocks which can be done with a single click on the computer. Long run, real estate pays 5%/year for appreciation plus what ever you can earn from "net" rental income. If you are handy and keep on upgrading your handyman skills then real estate can also be fun. Also, have a back up in case you need to "harass" some bad tenant out without going through grinding eviction procedures. A bad handyman type tenant can also "mess up" your property in ways that you incur several thousands in charges. Also, pro league bastards can also have a lawsuit on you for "this or that" happened inside the property and they got hurt etc. That will really take your night sleep and pile up on aggravation. Alternative is to get a good REIT and invest via tax free accounts. 8-9% returns with tax free build up can be good in the long run.
Thanks for all the replies. Seems that my original premise that real estate investing taking up lesser time than stocks is wrong. Nevertheless, I do observe more property investors making money than stock investors. Most people who touched stocks that I have spoken to lost money. Not true for property investors. No statistical evidence, though.
I think a big point many people are missing here is the diversification aspect of owning a few rental properties. Of course 6-10% a year rental return seems like a bad use of capital in a 9 year runaway bull market . However you have to remember the stock market (S&P and DOW) basically went no where for a full decade from 1999-2009 (and NASDAQ got slaughtered). If I could give one piece of advice to any young people it would be this- MULTIPLE STREAMS OF INCOME. No matter how great you are at trading or whatever else you do, having side income from other businesses/projects will help weather any rough stretches.
Instead of owning a few rental properties, the alternative is to own REITs which offer even more diversification as well as high interest income too. With REITs, I wonder if it makes sense to invest directly into property anymore given the lesser work involved.
The problem with REITS is they are too correlated with the stock market. Other things to think about rental properties is that rental prices will keep going up. So your yield will increase the longer you own the property. Also many favorable tax advantages as well as the unbeatable 1031 Exchange!