Here’s a statement that could be deemed as provocative by some – I believe that investing in a diversified portfolio over time has a greater probability of helping people achieve financial independence than investing in real estate. Now I say this as I personally have the majority of my net worth tied up in real estate via my primary home, but the statement is one that I fully believe. Why? For a number of reasons including the following:
• Liquidity – real estate is often not very liquid and requires much effort, fees and taxes to unwind if funds are needed.
• Returns – the stock market has historically returned more than real estate and it is projected to continue to do so.
• What about the idea of generating “passive Income”? We often hear about how real estate can provide “passive income” – but how does one define passive? Owning a home can carry significant maintenance requirements, property taxes, insurance, renovations, interest on loans and various other issues landlords often face with tenants (assuming it’s a rental). Alternatively, investing in a diversified portfolio carries none of these requirements and can truly be the least labor intensive and most passive way to generate returns and income over time.
Now, does this mean that I hate real estate and am advising everyone to sell their homes tomorrow? Absolutely not – I believe your primary home has a far greater potential return from a lifestyle perspective than most any other asset, because it’s an investment that you live in and use most from a day to day basis. With this being said, from a cost/benefit perspective – I still believe that sticking with a plan to invest in a diversified portfolio should be the default mode of investment for most people outside of their primary home.
