There are plenty of great reasons to own residential real estate – you need a place to live, it’s cheap to borrow money, you get a tax break, and you pay your own mortgage instead of someone else’s.
But there are also bad reasons to own real estate. They’re misleading and deceiving and can lead to life-defining bad decisions. Here are two of them.
1. “There’s no better way to get rich than real estate.”
Dozens of “buy real estate today with nothing down and own twenty apartments tomorrow” seminars will tell you this. And real estate allows for leverage (that is, borrowing) that can amplify your returns (as well as your risk). Some countries offer big tax incentives for real estate buyers.
But as we wrote a few weeks ago, a house or apartment often generates returns that are lower than those of the stock market. Since 1975, stock market returns for the S&P 500 have far outstripped those of real estate. Hong Kong property similarly underperformed the Hang Seng. Only in Singapore did residential real estate appreciate more than the stock market over the long term.
So in fact there is another, better way to get rich besides real estate. It’s called the stock market.
2. “I love collecting rent every month”
Yes, collecting rental checks is nice. But you can earn potentially higher monthly payments – without all the headaches of being a landlord.
The table below shows gross rental yields for various residential real estate markets. Some of them look quite attractive… until you realise these are before maintenance fees, ongoing expenses and taxes. Once fees and taxes are factored in, some of these yields get pretty close to zero. (Please note that this is national data – local data can of course vary considerably.)
Another way to earn a steady monthly income is by investing in dividend paying stocks, bonds or REITs (real estate investment trusts). You have to pay taxes on that income as well, but depending on where you live, it can be a much lower tax bracket than rental income.
There are also no maintenance fees, no late-night clogged-toilet calls to take care of, or “the power went out” texts to disturb you. And it’s a lot easier to sell a stock than it is to sell a rental property.
As you can see below, you can often earn higher yields from these investments than from being a landlord (except bonds at the moment).
The best reason to own real estate today is for diversification – to diversify your income and assets. But real estate isn’t the sure path to riches some claim it to be.