Is real estate really a good investment?
I mean, sure it’s tangible. Yes, it’s cool. Yes, it has worked for some, and it’s done wonders for me.
In fact, this entire website is dedicated to real estate investing and perfecting the art/science/luck of it. Hundreds of books have been written on the topic (including these, my top 21 favorite real estate books.) Each week on the BiggerPockets Podcast tens of thousands of listeners tune in to hear the best tips, tricks, and strategies for building wealth through real estate.
However, it’s rarely discussed – is real estate, itself, a good investment? And if so… why?
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Is Real Estate a Good Investment? Nope!
Historically, real estate actually has NOT been a great investment in itself. I know, a lot of you just choked on your lunch hearing that come from me, but bear with me a moment.
As famed economist and Nobel prize winner Robert Shiller has pointed out using the S&P/Case-Shiller Index, home values have actually appreciated, on average, at nearly the same rate as inflation over the past 100 years.
In other words – if you paid $100,000 cash for a home in 1970 and sold it in 2000 for $250,000 it may seem like you made a terrific investment. However, that change is only maintaining a 3% annual appreciation, pretty similar to inflation. They home hasn’t actually built them any wealth.
In addition, the home needed new windows, carpet, paint, and other changes throughout those 30 years, so it’s very possible that the owner of that home actually LOST money on their home purchase.
So, yes – buying a home with your $100,000 is probably better than tossing it into a bank account earning no interest but in itself, it’s really not a great investment. You’d probably be better off sticking that $100,000 in the stock market and earning an average of 8%.
As most real estate investors are screaming at their computer screens right now – there is a lot more to the picture that economists and financial advisors conveniently forget. Especially leverage. You see, most individuals don’t pay 100% for their home. They use a mortgage and take advantage of the wonderful world of using other people’s money (OPM). Although the person may have only put down 20%, they are able to realize the appreciation benefits of the entire 100% and cash flow whatever isn’t spent on the low interest mortgage payment.
For a more in-depth and intelligent discussion on the concept of leverage and misconceptions among economists, see Leon Yang’s Debunking the Buying a House is a Bad Idea Myth here on BiggerPockets.
You see, while homes may only be appreciating at 3% per year on average, if a person applies a loan to the equation the math changes quickly, for the better.
Is Real Estate Really an Investment at All?
Okay, so real estate, in itself, is not a great investment vehicle. So… why do we talk about real estate investors so much?
The truth is … most of what we do here on BiggerPockets is more akin to “real estate entrepreneurship” than “real estate investing.” We are business owners who use our brains (some more than others) to make income bleed from a normally bad investment – real estate. Yes, in the strictest sense of the word, we are usually “investing” because we are putting money into a project and hope to earn a return. However, we are also usually putting some kind of direct control or effort into the investment which makes it more of a business.
So… which is it? Is real estate an investment or a business?
I believe the definition of investment is more like a sliding scale rather than an on-off switch. I believe every investment has a level of passivity – even mutual funds (you still need to pick them, or meet with an advisor to help you.) Therefore, rather than thinking of it terms of “is this an investment or a business” I prefer to think of it on the “Sliding Scale of Passivity” as seen below:
Any investment could be anywhere on this line. For example, house flipping would probably tend to fall much closer to the “business” side of the line than the investment side. On the other hand, NNN Lease Investing would probably fall on the far left. There are hundreds of ways to invest in real estate, and the level of passivity would cover every pixel of the sliding scale above. Furthermore, different niches and different strategies can be done in more or less passive ways. For example, I know house flippers who flip hundreds of homes each year without ever stepping into the property. Others, however, flip one or two homes each year and do 90% of the labor themselves.
Is Real Estate a Good Investment… For You?
So, we’ve decided (or, at least, I have) that real estate, in itself, is not a great investment.
Of course not, but could one be better or worse for you?
If you are struggling to find out what niche and strategy is best for you, I’d recommend reading through The Ultimate Beginner’s Guide to Real Estate Investing here on BiggerPockets. It will give you a great overview of the different ways you can make money as a real estate investor and allow you to see the “big picture” of the real estate investing world.
The point I’m trying to make is this: Stating that, “real estate is a bad investment” or “real estate is a great investment” is useless. We have to dig in deeper. Context is everything. So next time an economist starts to tell you (because I know you have a lot of conversations with economists…) “real estate is a terrible investment” you know to dig in deeper and start asking questions. It’s not every day you get to be smarter than an economist – so take a moment to shine.