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I can't get past the idea that, if you work well in your job, you may get laid off or fired, and companies do not like to hire you when you get past the age 45 or 50. But if you invest in some houses or rental properties or fixer-upper, a lot of people can do well and be financial independent. I don't like the idea of being a landlord (and dealing with tenants).

Why is this often positioned as the only (best) way to build wealth? Is it really?

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    @NathanL This question doesn't ask about the risks of real estate investment, but plenty of other questions on the site do. – yoozer8 Sep 23 at 20:03
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    I would like to invite users to join me in voting to reopen this question. We don't close questions because they have a mistaken premise that we don't agree with. Indeed, the OP is asking the question because he had heard something related to personal finance that he is unsure about. And he is certainly not alone in wondering about this. We now have 8 great, objective, well-supported answers that many people in the future will find insightful and helpful. This is exactly the kind of question and answers we want on our site. It is on-topic, not too broad, and not primarily opinion-based. – Ben Miller - Reinstate Monica Sep 24 at 13:52
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    I have opened a meta question to discuss whether or not this question should be reopened – Ben Miller - Reinstate Monica Sep 24 at 13:56
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    (in a deleted comment) OP cites the book "Rich Dad, Poor Dad". The author made more money selling books and partnering with scam seminar offerings than in actual real estate. – JTP - Apologise to Monica Sep 25 at 13:09
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    Define "best". Creating a company like Amazon is a lot more profitable, if you can manage it. Working at the government is, in some countries, safer than owning real estate: the chances of getting laid off are lower than the chances of your two properties catching fire. Getting a job is cheaper than buying a house. Rationing your money and slowly spending it through the rest of your life has less management overhead than being a landlord. – Blueriver Sep 25 at 16:20

10 Answers 10

97

I think this might be an instance of "survivor bias" in that you only tend to hear from the people who were successful at it and made a lot of money off of it. Conversely you don't hear as much from the people who lost their shirt trying to flip a house or those who couldn't secure tenants at a good price.

If you're interested in the idea of passive real-estate investing (where you work with a property management firm who handles the purchase, upkeep and renting of your house and gets paid a fee from the proceeds) this article is pretty good.

But even the people who advocate for this approach make the point that you're probably only earning about 6% interest/year on your investment. At that rate I feel like you'd be better off just parking your cash in index funds and making ~10% per year with comparatively less risk.

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    isn't it true that if the return is 6%, but if after 15, 20 years the houses double in price, then it becomes 12%, not to mention the gain on the house prices... by the way, which index is 10% per year? – nopole Sep 23 at 14:39
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    If you spend 100K on a house, and earn 6% from people renting it and then after 15 years the value of your house is 200K you will have earned ~239K which works out to about 8.2% per year. This also assumes that your house doesn't depreciate in value at all which is a gamble. The average total stock market return is 10% VTSAX tracks that index and has a low MER. – Dugan Sep 23 at 14:59
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    Another downside of real estate is that it's not very liquid. If I want a bit of cash out of my mutual fund investments, I can just log in to my account, type a few keystrokes, and the money will be in my checking account in a couple of days. Compare that to trying to sell a house, or take out a loan on one. – jamesqf Sep 23 at 18:16
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    Does this ~6% interest include the fact that you're taking out a mortgage and thus operate with a 5x-10x leverage? – JonathanReez Supports Monica Sep 23 at 23:10
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    @JonathanReez Exactly, that $100k house costs you $20k of cash and some interest and cashflow. BUT, you need to have the ability to continuously come up with the cashflow. – quid Sep 23 at 23:49
62

What is the truth about this?

Pretty much no truth.

At 48 years old, I received an offer for a job where I was paid far more than any other employment I had previously. I chose it over two other competing job offers that were offered at a very similar time.

While I was laid off from that job, rather abruptly, I had a new job within a short time at age 52. About four weeks from the start of job search to my first day. The important part was I had sufficient savings to cover this emergency. Shortly after that, I also picked up some part time work that allows me to replicate the salary made at the former position. Additionally most of the people I work with, are newly hired and older than I.

Historically most people earn the most in their 50's and 60's as they have become experts in their field. That is the normal. Also is that if they lived a somewhat frugal life style they have a paid off home and cars (no debt), or a very large savings balance (like over 1 million). Some people were savvy enough to obtain both. Those in really good shape, financially, might welcome the layoff!

Keep in mind, that being laid off by a company, after a long history does not include the same harm that it once did. When pensions were very common it might mean a drastic decrease in retirement income. However, with 401Ks and the like it does not matter as much. If you are able to market yourself well, a lay off may mean a raise!

Sure there are stories of those being laid off and unable to find new work, but there could be reasons for this. Did they stay up on the latest technology? Are they willing to make less then the job they were laid off from? Are they part of a dying industry? Is their job function subject to automation?

Real estate is a business, like any other. It requires skill and knowledge. Profits are not guaranteed. In fact a highly leveraged real estate business with little experience is very likely to lead to bankruptcy. The same could be true if one opens up a clothing store, pizza place, or auto repair shop.

Leverage devours income. Inexperience leads to mistakes that also decreases income. The combination of the two are deadly to business solvency.

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    i think your case may be a special case. Some people say, if they can hire 25 or 28 year old, why would they hire 45 year old? But I think it depends on the field also. In software engineer field, people who have 15, 20 years of experience may not know the tech that is the latest 5 years which is the most relevant, and the companies need people to work 10 or 12 hours per day, or even sometimes Saturday, and they know the 25, 28 year old have more energy to do it and is more willing to do it (the 45 or 50 year old may oppose it)... – nopole Sep 24 at 1:50
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    "Knowing the tech" is the biggest misconception in the job market. People who "know the tech" don't necessarily make good worker. A business is driven by business needs. Tech people need to know business and understand concepts like ROI, Cost/Profit center work, asset depreciation, etc. How many companies successfully jumped on to the blockchain band wagon? Agile? Scrum? NoSQL? (there are over 200 versions by the way) The super mess of JS frameworks (Angular, Express, Node, React, etc, etc, etc.) – Nelson Sep 24 at 2:05
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    With newer Programming Languages and Frameworks, learning the syntax of a new language and writing runnable code gets easier every day. But more important than ever writing code which does the right thing in respect to actual business requirements needs a lot of experience and a good overview over everything which is connected to your piece of code. I'd take a bright 50 year old at 35hrs over an eager but inexperienced 25 year old at 50hrs every time when it comes to business critical work. – Falco Sep 24 at 9:51
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    @nopole I'm 33 and I just staffed my team with some experienced seniors last year. - I never worked overnight or 12 hours on a job, because I value a sustainable pace over crunch (it is even forbidden by law in Germany to do so) - and I already had to manage some young hotheads which did a lot of stupid stuff, while older colleagues usually knew how the chain of command works and followed it even when I was half their age. – Falco Sep 24 at 11:23
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    @GeorgeM and also in many countries companies do not have to pay pensions at all, because the government does. And what's more you have to pay people you let go a severence package, which is proportional to the amount of years they have been in your company. So sometimes it is even cheaper to keep someone another 2 years on the payroll, until he transitions into retirement (no severance pay) than to fire him and pay him the big severance package. - as I said different location different rules ;-) – Falco Sep 25 at 8:21
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Several other good answers that get into the details, but I think there are a few obvious things that need to be said here:

  • Real estate isn't a risk-free golden ticket - investing in real estate involves a lot of risk. It's easy to fail at it, and then you have nothing to fall back on.
  • Having a career with a skilled job isn't as dismal as you've made it out to be - If you've worked at a skill for a long time, you will be marketable. Assets (real estate) can always be lost or devalued, but if you know how to work, you can always earn money.
  • People who write books or promote income strategies are usually better experts at selling themselves than they are at the thing they're trying to sell - people who hold real estate investment seminars, or write books about investing in real estate, are trying to sell seminars and books. A best selling book is a best selling book. It may or may not reflect any value in terms of you making money.
  • What matters most is having a strategy, understanding the risks you're taking on, and making good decisions with your resources. In a comment, you mention that 50% of Californians do not have a retirement fund. This is because they did not decide to have one. It doesn't mean that "normal" jobs like being an engineer are a bad way to build wealth.

Let that last point sink in for a minute. It doesn't matter if your money comes from a salary for being an engineer, or rent from being a landlord, or from selling hot dogs at the stadium. What matters the most is making good decisions about how you spend or invest your money. Jobs or investments are just means to an end.

To be blunt, the answer to your question of,

Why does it seem the best way to make a living is to invest in real estate?

is: because you're not looking at the whole picture.

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    +1 especially for mentioning the risks. Many underestimate the problems with evicting nonpaying tenants. Depending on the jurisdiction, it can take a long time. Especially if the tenant has small children, is pregnant, has a chronic illness, or is a member of a protected minority. You might lose several months or years worth of rent, and lawyer's fees you will never get back if your tenants are unemployed. And even if you win, you might be unlucky and be featured in the news (or on a viral social media post) as the heartless greedy scum who put that poor starving family on the streets. – vsz Sep 24 at 6:20
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    @vsz I would never be a landlord. The amount of redtape and fine print you have to be aware of is ludicrous. I recently got a taste of it when I asked my landlord for something and the amount of bureaucracy was so ridiculous I really felt for him. – Magisch Sep 24 at 8:34
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    > If you've worked at a skill for a long time, you will be marketable... if you know how to work, you can always earn money. That's overstating it a bit; it depends on your career. There are plenty of historical examples of skilled careers that have become near-redundant in a short space of time. Steelworkers, for example, or coal miners. However, I don't disagree with the general point. – K. Morgan Sep 24 at 12:19
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    @K.Morgan I appreciate your comment. The OP seemed focused on real estate being good because it means you own an asset. The point I was trying to make is that the ability and skills needed to work is a powerful asset that should not be overlooked. I agree, there are many skills that have become less relevant over time. – dwizum Sep 24 at 13:02
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    Upvoted for the risk. I know many people that are landlords who just DON'T understand the risks they are running. – Arluin Sep 26 at 15:56
39

The sales pitch:

A few decades ago, I had a friend that was starting out in real estate investing. He explained his reasoning like this:

  1. Buy a starter home. Get a decent house/condo with the best rates because it is an owner occupied purchase. Live there for 5 years.
  2. Buy another house, get some renters lined up for the first place. Renters cover the mortgage on the first house, you buy another slightly nicer place.
  3. Rinse and repeat.

The idea here was that the renters pay all the mortgages, and after 30 years you own the house outright, so the rent becomes residual income. So for the average Joe without a pile of investment capital, this is the way to create wealth. A little bit of borrowed money here and there, and it multiplies with itself. What could go wrong?

Mugged by reality:

Good renters are good. Bad renters are... a nightmare. Roll the dice, do your due diligence, but at the end of the day, the people you do business with can be a huge liability. Can you afford to cover two (or more) mortgages, repairs, etc., during and after a protracted legal battle to evict a bad tenant?

What about a recession? What if you lose your job? What if your tenants lose their jobs? What if rents go down? What if the real estate market collapses a la 2008?

What Pete was explaining about leverage is this problem that if you borrow money from someone else, they expect you to pay it back (mortgage payments) and though they may be sympathetic that your renters aren't paying you the money they owe you, at the end of the day they're going to repossess your property and ruin your credit rating if you can't keep making the payments. Borrowed money always comes with risks. Investing in real estate isn't a silver bullet that will magically make you rich.

It works for some people, but it is a second job to be a landlord. If you want a second job, there might be easier side-hustles out there, but this may be the one for you.

It isn't all doom and gloom

I painted the bleak picture above because things can go very wrong. I don't like being a landlord, so I generally avoid it, but I've done it a few times for a few years while waiting for the real estate market to change before selling a property. The one tip I'll offer: if you want the best tenants, you might be better to ask slightly below the market rates for rent so that you get a large number of applications (which puts you in a position to choose the most stable tenants from the list).

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    +1 to eviction difficulties. This can be a particular nightmare in socialist-leaning jurisdictions like Canada which strongly favor renters rights. – JonathanReez Supports Monica Sep 23 at 23:12
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    @JonathanReez As someone born into a „socialist“ east block country I can assure you that Canada is neither socialist nor „socialist-leaning“. – lejonet Sep 24 at 10:29
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    In Japan, owners usually require tenants to pay an insurance company (保証会社) at the beginning of the contract. Later, if the tenant don't pay, the company does it and should handle the hassle. (as a tenant, I hate paying this company but it's quite mandatory if I want to live somewhere) – Alexis_FR_JP Sep 24 at 13:00
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    @lejonet not sure about definitions, but at least in BC you can't even give notice to a tenant without a good reason and it could easily take a year to kick out a non paying tenant. Absolutely awful for landlords. – JonathanReez Supports Monica Sep 24 at 16:14
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    @JonathanReez This might be the case, but still doesn’t equal „socialism“. – lejonet Sep 24 at 16:32
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No. You have an overly pessimistic view of holding a job, an overly optimistic view of real estate investment, and you don't even mention other alternatives.

Sure, you could get laid off from your job. That's stressful, but it's hardly the end of your life. Get another job. If you have marketable skills, this can be quite easy. I was fired once, and I got another job in about 2 months. I've never been laid off but I did once quit a job because the company was going bankrupt and it was obvious that a layoff was coming. I've gone through, let's see, 10 jobs in my life. I started my current job when I was 53, so it's hardly impossible to find a job after 45.

Some people make a bundle out of real estate. Others lose a bundle. I used to own a rental property as a sideline to my day job. I lost money on it every year until I finally bailed out and sold the property. I lost money every. single. year. It is not the magic money maker that some people seem to think. I've seen lots of discussion on this forum and elsewhere where someone calculates how much he'll make on a rental property that are wildly optimistic because they make very questionable assumptions. They assume that they will always have a tenant -- that they'll never, ever have a time when someone moves out and they don't have a new tenant moving in the next day. In real life, it can take months to get a new tenant. They assume the tenant will always pay the rent. In real life, it's not at all uncommon to get tenants who don't pay, and then you have to go through the eviction process. They make very low estimates of maintenance costs. If you are a skilled carpenter, electrician, and plumber and you can do all the maintenance yourself, and your time is worth nothing, maybe some of these estimates are plausible. But if you have to pay professionals, well, I think I'd get sick to my stomach looking at what I had to spend on maintenance. Etc.

What about other money making opportunities? There are many kinds of business that you could start besides a rental business. What about starting a laundromat, a law firm, a dog-walking service, a aircraft factory, etc, for thousands of other possibilities?

On your philosophical comment, "So the meaning of life is being a landlord (and dealing with tenants)? It seems like it will make life lose all its meanings." Even if it was true that being a landlord is the secret to financial success, you seem to be confusing "best way to make money" with "the meaning of life". The meaning of life is to get right with God, live for his glory, and enjoy his blessings. Yes, you have to make money to survive, and it's good if you can enjoy your work and get some satisfaction from it. But that's not the meaning of life. You need shoes to walk around, but that doesn't mean that the only reason you walk around is to get new shoes. Okay, I'm sure others on here will disagree with me about the meaning of life, but I suspect that few will say that it is make money.

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    I think we'll agree to disagree about the meaning of life :-), but it's definitely not "make money". – Martin Bonner supports Monica Sep 26 at 14:36
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I get the appeal of real estate investing and it is a big part of my retirement strategy. I like owning property because it is a thing I can go and interact with, it feels more permanent and real than the numbers in my retirement/brokerage accounts.

The fact is, though, plenty of people retire happily owning no investment properties. Being prepared for retirement is more about a lifetime of living below your means and investing prudently.

As far as investment performance goes, real estate results vary wildly. I believe that with adequate preparation and capital you can achieve fantastic results, but I would not suggest that it's the right fit for everyone. I'm a DIY type who enjoys fixing things up, so handling things myself makes being a landlord a part-time job in addition to my full time job. Perhaps I'd be making more if I sold the rentals, invested that all in the stock market and delivered pizzas part-time, who knows. Plenty of people have lost significant money on real estate investments, it is not a guaranteed path to wealth. There are nightmare tenants and declining housing markets that can financially ruin you. There is potential in real estate, and there's also a lot of competition/risk, don't believe anyone who pitches a bulletproof investment strategy.

6
What is the truth about this?

Only partial truth. Investing in real estate is a bad idea for many reasons:

  • Houses depreciate at the same time housing market appreciates. If you buy a house that is 20 years old, 100 years from now it will be 120 years old. Probably old enough to be demolished. Housing market appreciation happens because it's the market average; i.e. if average house is 35 years old, it will probably be still 35 years old 100 years from now. So, it's possible for the housing market as a whole to appreciate and individual houses to depreciate.

  • Houses require maintenance & repairs. Did you include the cost of maintenance & repairs in your calculations?

  • Diversification is poor. One poor tenant, and you will lose a lot of money.

  • Return is poor compared to the risk. For example, between 1778-1779 and 1814-1815 housing market in Amsterdam crashed 80% (the source for house prices is inaccessible now[1] but even rents decreased: http://www.stefanstraetmans.com/attachments/File/housingeconomics.pdf) -- it's about the same you would have lost in Great Depression if investing to stock market. So, risk is the same as it's for stocks. Return is worse.

However, investing (but not necessarily in real estate) is a good idea.

Invest your money into where the risk/return ratio is the best: stocks. Stocks for the long run!

[1] It used to be here: http://pub.maastrichtuniversity.nl/cda347a3-7fdf-426e-99a4-1a2c30717764

At least from my university, I can access https://onlinelibrary.wiley.com/doi/pdf/10.1111/1540-6229.00711 ...not sure if it's accessible outside of universities.

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    Your [1] appears to be available from web.archive.org/web/20150822031955/http://… – a CVn Sep 24 at 13:34
  • "Probably old enough to be demolished." The oldest house I lived in was at least 170 years old, and I expect it to be largely intact in another 100 years. At least in the UK houses essentially never decline in value (provided they are kept maintained). – Martin Bonner supports Monica Sep 26 at 14:39
4

"Why is this positioned as the only (best) way to build wealth?"

Because it's sold and marketed that way - various parties stand to gain a lot by you investing in property - essentially they can take their slice of the pie with minimal exposure while you shoulder most of the risk. But, the success stories are real because the real estate game provides easy access to Leverage (which if used responsibly can provide large amounts of profit for the risk-taker). Add some fancy asset inflation due to easy credit and the whole thing looks undeniably great.

"Is it really (the best way to build wealth?)"

No, just one of many different ways. In Australia (my residency) the space is 'crowded' and a lot of the value is already milked out by the banks providing finance and government imposing taxes but as already mentioned above there is still room for a savvy investor. Anyone considering this space should educate themselves on all aspects of tax implications, hidden fees, insurances, building certificates, etc. But don't fool yourself to think that over-leveraging yourself is a sure path to success, or that negative gearing is a divine thing, or that 'passive income' comes about at no-one else's expense.

Finally it's worth noting the landlord group effectively profit from a class of folk who don't have access to Leverage so there is a moral imperative which is often ignored by the spruiker (YMMV).

  • Can you elaborate on the last paragraph. E.g. on the moral imperative? – Peter Mortensen Sep 25 at 20:42
  • elaboration: Bidding on housing stock keeps prices out of reach for those with no access to Leverage, so a large property portfolio helps continue that situation. You need to be happy with the modern feudal system, knowing the game involves co-opting the productivity of others to increase your profit margins. Because most of us don't know anything different, this arrangement is socially acceptable by all parties, but it is not necessarily healthy for society. – Sid James Sep 25 at 22:45
  • "Bidding on housing stock keeps prices out of reach for those with no access to Leverage, so a large property portfolio helps continue that situation" This is nowhere near the only reason people rent. This might be the reason some people rent long term, but it's not the only reason people rent. – Stephen Sep 26 at 5:40
  • @Stephen - I agree, and mine is too broad a comment to paint the entire housing market. However it must still be compared to our parents day when it was possible to pay off an entire house in a three year time-frame. So it becomes just a discussion about percentages of affected. – Sid James Sep 26 at 9:34
  • @SidJames Yeah that's true, it was. But then again those houses were asbestos clad, not insulated and were built in a time where the unskilled labour market was huge (reducing the cost of construction). Now we have a more educated population who want huge houses with twice the number of people living in our capital cities. We've seen divorce rates skyrocket and birth rates plummet so there are more bedrooms per person than ever before. There are so many more factors to the housing market than negative gearing. – Stephen Oct 15 at 22:58
3

The thing with property, is like any other portfolio, you ought to diversify. And most people can't afford to diversify when they start in real estate.

Real estate investments can be good. I sold an apartment that had been paid for entirely with the bank's money, whose interest and other costs had been paid by the same renters from day 1 (and who decorated!) and the tax free[1] profit was more than my gross income from my day job for the year.

They can also be bad. I have another apartment that has cost me over 30% of the purchase price in repairs. It has only recently become profitable, and while unprofitable it was unsellable at anything close to a reasonable price. The temporary losses didn't break us, because we were getting income from the other rental.

So, diversify. If you can't afford to diversify, you are taking a huge risk. And few housing markets have had a sustained boom like my city, so huge capital gains are far from guaranteed.

[1] There is no capital gains tax in my country.

  • There is no capital gain in real estate or even stock in your country? Do you mind telling which country can have this benefit or maybe just the continent? – nopole Sep 24 at 5:33
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    I live in New Zealand. Not sure about stocks but the bright line for real estate is if you hold it less than two years it's taxed as income, otherwise it's capital gains and tax free. – Rupert Morrish Sep 24 at 5:39
1

Sorry, this isn't really an answer. I don't have time or space to enter all of my experience in investing in different ways. I have been a landlord, hated it. I got out of it at a small loss. Had one or two good tenants, had 3 bad to horrendous tenants (the last one failed to pay me, ever, and then when finally legally evicted ripped out all of the drywall, stole all the appliances, and even the storm door!

The best I can recommend is to attend seminars (and keep your wallet in your pocket, and your hand on your pocket the entire time!). Attend flipping and real estate investing seminars, attend those dinner and a pitch seminars from fiduciary wealth management advisers. Always be skeptical; the better it sounds, the more likely it is a scam. Get books from the library and read. Wait until you have a few score of these in your history. Then start interviewing fiduciary advisers to find one you are comfortable working with, that you think, based on your new-built experience, will do a good job. Then, if you feel like doing the rental thing, get their advice. They'll point out the risks, and if you are able to absorb those risks.

Also, of course, post your ideas on Reddit and let your friends poke holes in them! It's better to know where the pitfalls may be than to go in with a blind spot.

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