Is real estate a good investment?
It can be a good investment if you have a long time horizon, are willing to accept the risks of owning rental property, and consider all your alternatives.
Why do financial professionals recommend against real estate?
The honest answer is that it depends on your situation and what you expect to get. Before investing in real estate, you must accept that you can’t easily live on the principle. Real estate transactions are generally more complicated, riskier, and expensive than a straightforward option like a mutual fund.
Contrary to popular belief, real estate isn’t a risk-free investment. All investments carry risk, and real estate is no exception. You run similar risks to stocks because your investment may lose market value, but you have added risks of something physically happening to your property (like a burst pipe you have to replace).
That doesn’t automatically mean real estate is a bad thing. There are tax benefits and sometimes higher expected returns than stocks. No two real estate deals are identical, and no two financial plans are identical. Real estate is a good option if it is compatible with your plan.
A personal example about mistakes
Here is a case I saw as an auditor. A retiree decided Boulder real estate was a low-risk way to pay for retirement. He bought eight connected townhouse units near his home and lived on the income they generated. He made intelligent decisions about the rentals. They had stable, well-vetted tenants; he hired qualified professionals to do repair work; he worked with his insurance advisor to get good insurance. Then Boulder experienced what experts called a thousand-year flood.
Fortunately, he had insurance for the flood, but it wasn’t enough. Tenants stopped paying rent on the damaged units, so his income completely evaporated. To add insult to injury, his personal residence needed extensive repairs at a time when he had no income.
It was a classic catch-22. He needed to repair the rental units to get paid again, but he didn’t have enough reserves to pay for it.
–Wikimedia commons.
It took months for insurance to throw him a lifeline. After they finally paid, he needed the proceeds for his basic living expenses, so he couldn’t afford a contractor to fix the rental units. He was financially in a tight spot, and his only out was to sell the investment properties at a severe discount—far more than the insurance covered in damages.
Ultimately, he lost most of his wealth due to illiquid assets he thought were safe.
This article is intended to be used as general education and guidance. It is not investment or tax advice. Consult with a professional before making any major life decisions.