Investments can be analyzed based on 3 main criteria: liquidity, safety, and rate of return. Most investments won’t rank high in all three, instead, there’s some give and take. Investments high in rate of return are usually low in safety, highly liquid investments tend to be less safe, and extremely safe investments tend to be relatively illiquid and have lower rates of return.
Real Estate is no different, unfortunately, quite a few people seem to think it’s the ultimate investment.
According to this chart taken from Forbes.com, the S&P 500 has stomped the performance of US home prices over a 20-year period. Since 1980, home prices have increased 247%, whereas the S&P 500 shot up over 1,000%, a staggering comparison.
So, Real Estate scores low on 2 of our 3 criteria, and the third criterion, Safety, is arguable. Maybe we should be rethinking that common belief that Real Estate is so great. Maybe every Tom, Dick, and Joe needs to stop purchasing homes because their friends told them it was a good idea.
Far too many people talk about Real Estate as if it’s the ultimate investment; in the right hands, it can be great, but it’s no miracle worker.
Read the whole thing.
2 comments:
There's no doubt that equities are a better investment than real estate long term.
However, owning real estate is a better investment than renting real estate, which is also a useful comparison. For any given piece of real estate, owning will generate a return on investment, whereas renting will not.
The problem is that many people end up buying a far more expensive property than they would otherwise rent. So the issue there becomes more one of scale rather than buying vs renting.
Sad to say, also, but for many people if they don't invest in real estate through their own home, they will not automatically invest in the equities markets. They will just spend on other consumables. So while real estate may not be the best investment available, for many it is the only investment they know or will consider, and so it is better than nothing.
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