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).



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