The Truth: Real Estate Is a Poor Investment For Most Individual Investors

Real estate agents (and most homeowners) are not going to like me after this section, but in truth, real estate is the most overrated investment in America. Americans'?largest "investments" are typically their house, but even in a booming market, it is also the place where Americans lose the most money. People often miss this because real estate is practically a religion in America.?

"You're throwing away money on rent."

"Prices in real estate always go up!"

"It's tangible!"

"You can use leverage!"

"You have to live somewhere!"

"You can deduct the interest from your taxes and save money!"

"Buy land: They’re not making it anymore!"

If you’re thinking of your primary residence as an investment, real estate provides mediocre returns at best. First, there’s the problem of risk. If your house is your biggest investment, how diversified is your portfolio? If you pay $2,000 per month to a mortgage, are you investing $6,000 per month elsewhere to balance your risk? I hope so, but for most people — probably not. Second, the facts show that real estate offers a very poor return for individual investors. Over the century from 1915 to 2015, the real value of American farmland increased by an average of only 1.1 percent a year. Also: Yale economist Robert Schiller found that from 1915 through 2015, real home prices rose even more slowly over the same period — an average of only .6 percent a year.

I know this sounds crazy, but it’s true.

We simply?fool ourselves into thinking that we’re making money when we’re really not. For example, if somebody buys a house for $500,000 and sells it for $750,000, they think "Great! I made $250,000." But in reality, they’ve forgotten to factor in important costs like property taxes, maintenance, and the opportunity cost of not having that money in the stock market.

The truth is that, over time, investing in the stock market has trumped real estate quite handily — which is why renting can be a great decision.

I’m not saying buying a house is a bad thing. It can be a phenomenal purchase. I plan to purchase a house someday — but I recognize?it for exactly what it is, a purchase, rather than an investment.

The difference is stark.

Tomorrow?I want to show you why renting is actually a smart decision for many people, especially if you live in an expensive area like New York or San Francisco. But first, let’s rid of the idea that renters are “throwing away money” because they’re not building equity. Any time you hear clichés like that — in any area of personal finance — beware.

It’s just not true, and I’ll show you the numbers to prove it.