Is Real Estate ever a BAD investment? If so, when?
"No, it can really not. Look at Detroit, which has lost a million residents over the past few decades. There is plenty of real estate which will not go for anything like it was sold. Other markets are very risky, like Florida, where speculators drive too much of the price for it to be stable. You have to be sure to buy on the downturn. A lot of price drops in real estate are masked because sellers just don't sell, so you don't really know how low the price is if you absolutely had to sell. In general, in most of America, anyway, you can expect Real Estate to keep up with inflation, but not do much better than that. It is the rental income or the leverage (if you buy with a mortgage) that makes most of the returns. In urban markets that are getting an influx of people and industry, however, Real Estate can indeed outpace inflation, but the number of markets that do this are rare. Also, if you look at it strictly as an investment (as opposed to the question of ""Is it worth it to own my own home?"") there are a lot of additional costs that you have to recoup, from property taxes to bills, rental headaches etc. It's an investment like any other, and should be approached with the same due diligence." Real estate is a lousy investment because: Renting a home and buying a home, all else being equal, are pretty similar in costs in the long term (if you can force yourself to invest the would-be down payment). So, buy a home if you want to enjoy the benefits of home ownership. Buy a home if you need to hedge against rising housing prices (e.g. you're on a fixed income and couldn't cope if rent increased a bunch when the economy heated up). Maybe buy a home if you're in a high tax bracket to save yourself from being taxed on your imputed rent, if it works out that way (consult your financial advisor). But don't consider it a really great investment vehicle. Returns are average and the risk profile isn't that attractive. Real estate is always an interesting dynamic.  In most cases prices have always gone up.   Price is mainly a function of demand.  Sometimes demand is artificially inflated over a short term period and can come down quickly due to corrections.  During recessions the housing market will usually slow down.  There are some rare instances where certain areas never recover (see Subprime Mortgage Crisis Savings & Loans Crisis where scores of unwanted properties exist).  Things to consider: I'm surprised to even hear this question with the current state of devaluation of real estate.  One thing I'll add to the other answers is to make sure you are doing a true apples/apples comparison to other investments when considering real estate. You can't just take subtract the purchase price from the sales price to get your ROI.  Real estate has very heavy carry costs that you need to factor into any ROI calculation including: One more point: A house that you live in shouldn't be considered an investment, but rather an expense. You have to be able to liquidate an investment and collect your return. Unless you plan to move back in with your parents, you are always going to need a place to live so you can never really cash out on that investment, except perhaps by downgrading your lifestyle or a reverse mortgage. "All other factors being equal, owning your primary residence is almost always a good investment over the long haul. Why? Because you have to live somewhere, and rentals, especially long-term leases that are important when you have kids in school, etc.,  are generally in the same ballpark as a mortgage in most markets. Giving $1,500 to a landlord gets me 30 days of living somewhere. Giving $1,500 to the bank gets me a place to live and equity in an asset which requires maintenance, but always has intrinsic value.  Detroit is one extreme, Manhattan or Silicon Valley is another real estate extreme... everywhere else is somewhere in the middle. What isn't always a good investment is speculating in highly elastic ""investment property"" like vacation condos as an amateur. It's a cyclical market, but our attention spans are too short to realize that. As most of the other answers to this question indicate, people tend to be down in the dumps and see all of the problems with real estate when the market is not very good. Conversely people only see the upside and are oblivious to problems when the market is high." "As Yishani points out, you always have to do due diligence in buying a house. As I mentioned in this earlier post  I'd highly recommend reading this   book on buying a house associated   with the Wall Street Journal - it   clearly describes the benefits and   challenges of owning a house. One key   takeaway I had was - on average houses   have a ""rate of return"" on par with   treasury bills. Its best to buy a house if you want to live in a house, not as thinking about it as a ""great investment"". And its certainly worth the 4-6 hours it takes to read the book cover to cover." "There's an aspect to real estate that's under-discussed. When you take all factors into account, it just about keeps up with inflation over the long term.  Three factors: Now - when you normalize all of this, calculating the ""hours worked"" needed to pay for the median home, you find a nearly flat line at just over 40 or so hours of pay per month."
"Brendan, The short answer is no, there is no need to get into any other funds. For all intents and purposes the S&P 500 is ""The Stock Market"". The news media may quote the Dow when the market reaches new highs or crashes but all of the Dow 30 stocks are included in the S&P 500.  The S&P is also marketcap weighted, which means that it owns in higher proportion the big ""Blue Chip"" stocks more than the smaller less known companies. To explain, the top 10 holdings in the S&P represent 18% of the total index, while the bottom 10 only represent 0.17% (less than 1 percent). They do have an equal weighted S&P in which all 500 companies represent only 1/500th of the index and that is technically even more diversified but in actuality it makes it more volatile because it has a higher concentration of those smaller less known companies. So it will tend to perform better during up markets and worse during down markets. As far as diversification into different asset classes or other countries, that's non-sense. The S&P 500 has companies in it that give you that exposure. For example, it includes companies that directly benefit from rising oil prices, rising gold prices, etc known as the Energy and Materials sector. It also includes companies that own malls, apartment complexes, etc. known as the Real Estate sector. And as far as other countries, most of the companies in the S&P are multi-national companies, meaning that they do business over seas in many parts of the world. Apple and FaceBook for example sell their products in many different countries. So you don't need to invest any of your money into an Emerging Market fund or an Asia Fund because most of our companies are already doing business in those parts of the world. Likewise, you don't need to specifically invest into a real estate or gold fund.  As far as bonds go, if you're in your twenties you have no need for them either. Why, because the S&P 500 also pays you dividends and these dividends grow over time. So for example, if Microsoft increases its dividend payment by 100% over a ten year period , all of the shares you buy today at a 2.5% yield will, in 10 years, have a higher 5% yield. A bond on the other hand will never increase its yield over time. If it pays out 4%, that's all it will ever pay. You want to invest because you want to grow your money and if you want to invest passively the fastest way to do that is through index ETFs like the $SPY, $IVV, and $RSP. Also look into the $XIV, it's an inverse VIX ETF, it moves 5x faster than the S&P in the same direction. If you want to actively trade your money, you can grow it even faster by getting into things like options, highly volatile penny stocks, shorting stocks, and futures. Don't get involved in FX or currency trading, unless it through futures." Of course, you've already realized that some of that is that smaller estates are more common than larger estates.  But it seems unlikely that there are four times as many estates between $10 and $11 million as above that range.   People who expect to die with an estate subject to inheritance tax tend to prepare.   I don't know how common it is, but if the surviving member of a couple remarries, then the new spouse gets a separate exemption.  And of course spouses inherit from spouses without tax.  In theory this could last indefinitely.  In practice, it is less likely.  But if a married couple has $20 million, the first spouse could leave $15 million to the second and $5 million to other heirs.  The second spouse could leave $10 million to a third spouse (after remarrying) and another $5 million to children with the first spouse.  All without triggering the estate tax.   People can put some of their estate into a trust.  This can allow the heirs to continue to control the money while not paying inheritance tax.  Supposedly Ford (of Ford Motor Company) took that route.   Another common strategy is to give the maximum without gift tax each year.  That's at least $14k per donor and recipient per year.  So a married couple with two kids can transfer $56k per year.  Plus $56k for the kids' spouses.  And if there are four grandchildren, that's another $112k.  Great-grandchildren count too.  That's more than a million every five years.  So given ten years to prepare, parents can transfer $2 million out of the estate and to the heirs without tax.   Consider the case of two wealthy siblings.  They've each maxed out their gifts to their own heirs.  So they agree to max out their gifts to their sibling's heirs.  This effectively doubles the transfer amount without tax implication.   Also realize that they can pretransfer assets at the current market rate.  So if a rich person has an asset that is currently undervalued, it may make sense to transfer it immediately as a gift.  This will use up some of the estate exemption.  But if you're going to transfer the asset eventually, you might as well do so when the value is optimal for your purpose.   These are just the easy things to do.  If someone wants, they can do more complicated things that make it harder for the IRS to track value.   For example, the Bezos family invested in Amazon.com when Jeff Bezos was starting it.  As a result, his company could survive capital losses that another company might not.  The effect of this was to make him fabulously rich and his parents richer than they were.  But he won't pay inheritance tax until his parents actually transfer the estate to him (and I believe they actually put it in a charitable trust).  If his company had failed instead, he still would have been supported by the capital provided by his parents while it was open (e.g. his salary).  But he wouldn't have paid inheritance tax on it.   There are other examples of the same pattern:  Fred Smith of FedEx; Donald Trump; Bill Gates of Microsoft; etc.  The prime value of the estate was not in its transfer, but in working together while alive or through a family trust.  The child's company became much more valuable as a result of a parent's wealth.  And in two of those examples, the child was so successful that the parent became richer as a result.  So the parent's estate does count.  Meanwhile, another company might fail, leaving the estate below the threshold despite a great deal of parental support.   And those aren't even fiddles.  Those children started real companies and offered their parents real investment opportunities.  A family that wants to do so can do a lot more with arrangements.  Of course, the IRS may be looking for some of them.   The point being that the estate might be more than $11 million earlier, but the parents can find ways to reduce it below the inheritance tax exemption by the time that they die. Real estate is not an investment but pure speculation. Rental income may make it look like an investment but if you ask some experienced investor you would be told to stay away from real estate unless it is for your own use. If you believe otherwise then please read on : Another strong reason not to buy real estate right now is the low interest rates. You should be selling real estate when the interest rates are so low not buying it. You buy real estate when the interest rate cycle peaks like you would see in Russia in months to come with 17% central bank rate right now and if it goes up a little more that is when it is time to start looking for a property in Russia. This thread sums it up nicely. Apples and oranges. The stock market requires a tiny bit of your time. Perhaps a lot if you are interested in individual stocks, and pouring through company annual reports, but close to none if you have a mix of super low cost ETFs or index fund.  The real estate investing you propose is, at some point, a serious time commitment. Unless you use a management company to handle incoming calls and to dispatch repair people. But that's a cost that will eat into your potential profits. If you plan to do this 'for real,' I suggest using the 401(k), but then having the option to take loans from it. The ability to write a check for $50K is pretty valuable when buying real estate. When you run the numbers, this will benefit you long term.  Edit - on re-reading your question Rental Property: What is considered decent cash flow? (with example), I withdraw my answer above. You overestimated the return you will get, the actual return will likely be negative. It doesn't take too many years of your one per year strategy to wipe you out.  Per your comment below, if bought right, rentals can be a great long term investment. Glad you didn't buy the loser. My equities portfolio breaks down like this: (I'm 26 years old, so it is quite aggressive) Additionally, I have a portfolio of direct real estate investments I have made over the past 4 years.  I invested very aggressively into real estate due to the financial crisis. As a result of my aggressive investing & strong growth in real estate, my overall asset breakdown is quite out of balance. (~80% Real Estate, ~20% Equities) I will be bringing this into a more sensible balance over the next few years as I unwind some of my real estate investments & reinvest the proceeds into other asset classes. As for the alternative asset groups you mentioned, I looked quite seriously at Peer to Peer lending a few years back. (Lending Club) However, interest rates were quite low & I felt that Real Estate was a better asset class to be in at the time.   Furthermore, I was borrowing heavily to fund real estate purchases at the time, and I felt it didn't make much sense to be lending cash & borrowing at the same time.  I needed every dime I could get a hold of.  :)  I will give it another look once rates come back up. I've shied away from investing in things like actively managed mutual funds, hedge funds, etc ... not because I don't think good managers can get superior returns ... rather, in my humble opinion, if they DO get above average returns then they simply charge higher management fees to reflect their good performance. Hope this helps! You apparently assume that pouring money into a landlord's pocket is a bad thing. Not necessarily. Whether it makes sense to purchase your own home or to live in a rental property varies based on the market prices and rents of properties. In the long term, real estate prices closely follow inflation. However, in some areas it may be possible that real estate prices have increased by more than inflation in the past, say, 10 years. This may mean that some (stupid) people assume that real estate prices continue to appreciate at this rate in the future. The price of real estates when compared to rents may become unrealistically high so that the rental yield becomes low, and the only reasonable way of obtaining money from real estate investments is price appreciation continuing. No, it will not continue forever. Furthermore, an individual real estate is a very poorly diversified investment. And a very risky investment, too: a mold problem can destroy the entire value of your investment, if you invest in only one property. Real estates are commonly said to be less risky than stocks, but this applies only to large real estate portfolios when compared with large stock portfolios. It is easier to build a large stock portfolio with a small amount of money to invest when compared to building a large real estate portfolio. Thus, I would consider this: how much return are you going to get (by not needing to pay rent, but needing to pay some minor maintenance costs) when purchasing your own home? How much does the home cost? What is the annual return on the investment? Is it larger than smaller when compared to investing the same amount of money in the stock market? As I said, an individual house is a more risky investment than a well-diversified stock portfolio. Thus, if a well-diversified stock portfolio yields 8% annually, I would demand 10% return from an individual house before considering to move my money from stocks to a house. buying real estate is for people with sufficient financial resources to cover market downturns. Please read about the 2008 real estate market. Investing in real estate when you are a poor college student is a sure way to become a bankrupt college student. A single word answer to your question: No. Not reasonable. Your best investment is completing college with as little debt as possible and the most practical experience in the market area you are interested in entering. China is in the middle of a residential housing bubble, and now is probably a horrible time to invest in real estate in China.  Even if China wasn't near the peak of its bubble it would probably still be a bad idea because owning real estate in a foreign country is expensive and risky. There are real currency risks, think what would happen if the yuan declined significantly against the dollar. There is also the risk of the government seizing foreign held investments (not extremely likely but plausible). Another consideration is that it would be next to impossible for you to get a loan to purchase a property US banks wouldn't touch it with a 10 ft pole and I doubt Chinese banks would be very interested in lending to foreigners.