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Do people have good pieces of evidence about whether or not Real Estate is worth investing at all? What's a good measurement to decide this (e.g., simply looking at value increases?)

If I have X amount to invest, should 100% of it go to bonds and stocks, in particular ETFs? Should some percent of my portfolio also include real estate investments to rent as a landlord (I'm not talking about REITs)?

Here's an article that featured Shiller which spurred this question.

http://www.cbsnews.com/news/history-says-home-real-estate-is-a-bad-investment/

Other Sources Is Real Estate ever a BAD investment? If so, when? In general, is it financially better to buy or to rent a house?

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    You've linked to three articles, offering long term data. What exactly is your question? Being a landlord is quite different than buying ETFs. – JoeTaxpayer Apr 22 '14 at 22:23
  • just added some more details: I'm wondering if people could comment on whether or not real estate investing is worth it at all. It seems no, unless it's your own home and you'll be living in the area for at least a decade? – user3314418 Apr 22 '14 at 22:26
  • I think the article you linked to does make for some good debates on real estate and the S&P as an investment vehicle. How every, in my opinion the article fails to mention the cost incurred by the average S&P investor who gets charged a 2% management fee. For me, it's ultimately about controlling my investment. I want to have the right to choose how my investment is managed and I cannot do that with stocks or bonds, but they are part of a layered investment portfolio. – sdgenxr Apr 23 '14 at 16:26
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    @sdgenxr - Can you substantiate that statistic? "the average S&P investor who gets charged a 2% management fee." One can buy a .05% S&P ETF, no one is forced to pay that cray 2%/yr expense. – JoeTaxpayer May 6 '14 at 16:49
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Real Estate potentially has two components of profit, the increase in value, and the ongoing returns, similar to a stock appreciating and its dividends.

It's possible to buy both badly, and in the case of stocks, there are studies that show the typical investor lags the market by many percent.

Real estate is not a homogeneous asset class. A $200K house renting for $1,000 is a far different investment than a $100K 3 family renting for $2,000 total rents. Both exist depending on the part of the country you are in.

If you simply divide the price to the rent you get either 16.7X or 4.2X. This is an oversimplification, and of course, interest rates will push these numbers in one direction or another. It's safe to say that at any given time, the ratio can help determine if home prices are too high, a bargain, or somewhere in between.

As one article suggests, the median price tracks inflation pretty closely. And I'd add, that median home prices would track median income long term.

To circle back, yes, real estate can be a good investment if you buy right, find good tenants, and are willing to put in the time.

Note: Buying to rent and buying to live in are not always the same economic decision. The home buyer will very often buy a larger house than they should, and turn their own 'profit' into a loss. e.g. A buyer who would otherwise be advised to buy the $150K house instead of renting is talked into a bigger house by the real estate agent, the bank, the spouse. The extra cost of the $225K house is the 1/3 more cost of repair, utilities, interest, etc. It's identical to needing a 1000 sq ft apartment, but grabbing one that's 1500 sq ft for the view.

  • Hi Joe, just upvoted you. thanks for the insight. What is the ratio you calculated called? Additionally, how might one find data to calculate these ratios - the american community survey? – user3314418 Apr 22 '14 at 23:45
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    "price to rent ratio" is it. Keep in mind, it varies dramatically from city to city, and from single to multifamily. – JoeTaxpayer Apr 22 '14 at 23:52
  • @JoeTaxpayer I've usually seen investment property evaluated based on its "return on investment," expressed as a percentage (the yearly rent divided by the initial cost of the property). E.g., $12,000 / $200,000 = 0.06 = 6% compared to $24,000 / $100,000 = 0.24 = 24% indicates that the cheaper house provides a higher return on investment. Is there a reason you prefer the "price to rent ratio?" – thohl Jan 13 '17 at 17:12

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