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Let's say I have a chunk of cash sufficient to cover a 50% down payment on an average house (£600k). Or, buy an inexpensive house outright. Let's also say I must use the money for real estate—I cannot invest it in the market at this time due to the terms of inheritance.

With all of the costs and fees, plus the £20K stamp duty, there are already considerable losses. Essentially, the ROI from the first year (excluding interest) will be about -8%. That is one above-average stock market year, or 2-3 lower risk market years (mixing in some bonds).

I can either rent the house out, or live in it for up to 2 years then either sell it or rent it out. Long-term residence there is not an option. Note also I must remain in a high cost-of-living area for at least two more years due to my job.

I am quite experienced with investing but have zero real estate experience.

Could I justify getting a mortgage and doing some renting, or should I just liquidate by buying a cheap house, renting it out for a short while, then selling it.

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    Your question speaks of Real Estate vs Index Fund, yet your content speaks of Big House vs Small House. – base64 Jun 17 '20 at 11:57
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    It sounds like your question is more: should I or should I not get the mortgage for a second home? Also, are there requirements that it be used to buy only one house? Are there requirements that it must be in England or even the UK? – Nick2253 Jun 17 '20 at 12:46
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    I think it's more useful to look at this as “being a landlord” rather than “real estate investment”, because running a business is not as passive as buying some stocks. It seems you really just want to tie up some money in a house for a while to fulfil some inheritance requirements, and are looking for the long-term cheapest solution for that? Including considering opportunity cost from not investing in stocks? It seems you'd be guaranteed to lose money when buying a house for a short term, so your goal would be to minimize transaction costs. – amon Jun 17 '20 at 12:57
  • There still exist plenty of mutual funds with front end and back end loads, so it does remain possible to do a true apples-to-apples comparison with several percent of the value of the investment scraped off the top to brokers and agents when you trade into and out of the position. – user662852 Jun 17 '20 at 15:53
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I once saw a similar question and tried to find it but can't; the short answer given there was that unless you enjoy being a landlord, stocks would be the better way to go.

A few years back I went the real estate route and after all the expenses, the headache of finding renters when the apartment was vacated, repairs etc, an index find would probably have given me the same return on investment without the extra curricular activities that an landlord must tend with.

Also, when I was ready to sell, it took a total of 9 months to find a buyer and until the closing was finalized.

You get your money after selling your index funds in a couple of days.

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    This is important, a lot of people find out too late that they weren't actually in a good rental market or that they don't like being a landlord. Just because some people make good money at it doesn't mean it's a suitable strategy for everybody in any market. – Hart CO Jun 17 '20 at 18:24
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Real estate is a legitimate business but you should go into it with deliberate intention. There will be taxes to manage, proper insurance put in place, renters to deal with, and the property to manage. You may want to outsource some of those but they will cut into your profitability. And that is if you pay for the property with cash.

Once you add leverage into the mix you then add risk as leverage magnifies both the profitability and losses when they occur.

If those things sound attractive to you, then real estate should be explored.

The nice thing about index funds, is you put it in there and forget about it. You may want to do some portfolio re-balancing, occasionally, but the labor is minimal. There is really nothing to manage. This allows someone to concentrate on their career allowing them to earn more money to invest.

Even if one knew that real estate would outperform index funds over the next ten years, a person might be wiser to choose index funds with the difference being made up in increased wages and greater mental health.

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