People have a fixation with real estate. I can't even count the number of times people have told me to never ever sell a piece of property because "prices only go up!". Really? Here's an article from Forbes from 2005 that compares real estate prices across the country with the S&P 500 index.
U.S. real estate sale prices increased more than 56% from the beginning of 1999 to the end of 2004, as tracked by the Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development. The S&P 500 index dipped nearly 6% during that same period.But if you take a longer view--say 25 years--you'll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.
Of course, as the article points out, you can't live in a stock portfolio like you can in a house, but then again, your stock portfolio also won't need to be painted and re-roofed every few years. Maybe most important, rental property can go vacant for a month or more when a tenant leaves, which can seriously cut into your revenue stream. Plus, real estate is illiquid and hard to get rid of if there is a downturn, but your mortgage bills will just keep coming.
One other attribute of real estate that the article doesn't mention is that you can borrow money to buy property, which lets you put more money at risk than you actually have. This can work out well when prices go up, but when they down you can end up getting screwed. People who survived the housing bust in Los Angeles in the early 1990s should be familiar with this principle.
Finally, when real estate goes up, all real estate in the country tends to go up; when it goes down, it all tends to go down. One of the most important principles of investing is diversification, and putting all your money into real estate should be an obvious no-no. Since most investors already put a lot of money into purchasing the house they live in, does it seem wise to then put additional investment money into more real estate? Anyway, if you really want to make money from real estate, why bother with the hassle of owning the property yourself? Invest in real estate mutual funds (REMFs).
That's an attribute of stocks, too. The difference is that few of us can afford to purchase real estate in cash, while only the most speculative of us trade on margin.
Another thing about stocks is that you cant be paid to invest in stocks. Whereas in real eastate you can buy a house and rent it and quite possibly have a net investment of close to $0.00 over time and still build equity the entire time. It's even possible to earn income on your investment.
As far as mortgage goes, I've had my house for about 2 years and while I haven't done the math, Im sure my net investment is somewhere in the neighborhood of $1,000 because I'm single and I rent rooms out. I have about $30,000 in equity.
Equity, in my thinking, is imaginary money. It is based on what the houses around you sell for and assumes they sell for more than you bought your home for. In fact it doesn't exist until you sell your home and end up getting that imaginary cash. (equity loans is selling your house to yourself)
My point is, the only thing you should be putting your house "up" for is necessary improvements/repairs to that same house. Improvements that have a real-market-value. For example, landscaping is not an house improvement, unless you're stearing a river away from your house. It only improves the "sellability" of the house. Equity Improvements are like the new roof, new siding, new windows, foundation repair, etc. Never underestimate the value of "sweat-equity", too. Doing it yourself has real and perceived value"
Never put the roof over your head up against anything but your house, and even avoid that if you can.
Retirement $$ should never be put up for anything...ever.
If you have "extra cash": First, I'd like to be your friend. Second, feel free to invest it however you see fit, but understand that it's like gambling given the current world affairs. Make sure you can afford to lose it and still keep the roof over your head. Earn the interest and protect the principle.
Food, Shelter, Clothing are not things to risk.
Why is it when people compare real estate to stocks they want to talk about your home as a real estate investment? Real estate investments are rental properties, not your own home. If I invest 25,000 in a property that is worth 150,000 and rent it out I will beat the stock market every time. The renter is paying the property off for me and I get 5-6% a year on average, and a lot more sometimes, ON THE VALUE OF THE HOUSE, not on my investment. You can't do that with stocks. You get to leverage your investment money. You also can then move into the house for a couple of years and then sell it and get up to a 250,000 capital gain exemption 500,000 if your married. Do that with a stock. Of course there are risks but also in stock. Ask anybody who bought Enron. At least I am in control of the rental property. I am the CEO, not some smuck who is greedy and wants to take my money and run, like Skilling. So stop the misleading comparisons and compare real real estate investing, not your own home or a REIT.
Jay, you've pointed to the main reason why I like real estate investment: direct control. I can't visit a corporation and scout out their talent. I have little idea what value they afford; and no matter how much paper research I've got at my disposal, I can't outperform market with loads of insider trading. But I can look a house up and down, scout a neighborhood, look at the city's real estate trends, make some repairs myself, etc.
Loss of rental income to vacancy is a risk, but you should already have done your research ahead of time to calculate the likelihood of taking that loss.