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?
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.
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.
Several other good answers that get into the details, but I think there are a few obvious things that need to be said here:
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.
A few decades ago, I had a friend that was starting out in real estate investing. He explained his reasoning like this:
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?
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 if tenants stop paying because there is an eviction moratorium during a global pandemic?
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.
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).
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.
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.
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.
"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).
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.
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.
Think of real estate as an investment like stocks. However unlike stocks, which is more akin to gambling and luck, there are 2 main differences.
Real estate is more of a skill than just gambling. You're not just picking it and watching a stock ticker. There are skills to picking properties, flipping them, land lording aka property management.
There are special incentives by the government that let you get a leg up. For example, as a first time home buyer, you can get maybe a FHA or VA loan with very low money down, then live in the unit and rent out most of the rooms. This is something called "House Hacking" in the Bigger Pockets community. So imagine being able to buy $100,000 of really safe stocks that provide a good dividend with just $3,500. That is something you can do with a house but not with the stock market, because the government allows special loans for property because they want people to become home owners. You can do this for about 10 convention loans per person. And if you can get to 10, you're usually addicted and skilled and networked enough to keep going and find other ways to finance it. Also, the house is collaterol that they can take back. To get a loan to buy some stocks, you'd have to get a personal loan at a much higher interest rate and maybe have to put something up as collaterol. Because if you just buy stocks with it and the stocks go to zero, then the bank has nothing they can repossess. You can buy stocks on margin but that is very risky and doesn't have government benefits for that kind of a loan.
