Historical Performance of Real Estate Empire vs. Stocks

This question, historically, has been discouraged here in r/pf - with the reasoning usually indicating issues with the performance of this strategy compared to the stock market as well as the effort required. I would recommend asking this over in r/realestate, or even on the biggerpockets.com forum.

For what it's worth as an anecdote - I'm someone who has 3 multifamily properties, with a 19% year over year return cash money, and a 43% yearly return if accounting for equity gains (not even adding in any appreciation). I spend about 300 hours a year on these properties, averaging 5.7 hours a week.

"Real Estate Empire" is a bit of an odd term to use here, but I assume that you mean that you eventually would like to have a portfolio of residential properties that you can rent out and turn a profit on. I would strongly discourage you from doing this.

Having one or two investment properties that are easy to manage and that you can ensure have reasonable tenants makes perfect sense for steady income for an individual. However, scaling these sorts of operations is hard for a number of reasons:

1. Tenants, by and large, are a horrible pain to deal with. The more tenants you have, the more headaches you have, and paying the various expenses for multiple tenants in addition to the salary of a property manager (or worse, the fee for a property management company) will take whatever profit you're able to turn and burn it up in front of you.

2. Owning multiple residential properties exposes you to wide fluctuations in market factors. Given the turbulent state of the single family residential market over the last 15 years, I would strongly urge you to not put all your eggs in such a flimsy basket.

3. Your competition in the SFR arena are massive companies (REITs, Public Companies, apartment management companies, housing developers, etc.) as a small-time player, you will not be able to beat these guys without some sort of differentiating factor. My guess is, and don't take this personally, that you don't have that.

4. Residential real estate is, by all accounts, not a good investment when compared to the S&P as a benchmark (or even the NAREIT index as a benchmark).

My advice is to continue as you have been. Maybe invest in a second property, but keep your exposure as minimal as possible. Get yourself into passive investing, as time and time again it shows it's the safer bet.

Then, when you get your net worth up to a few hundred million dollars, you can start buying up office buildings or apartment buildings, and you'll be in a much safer position to generate steady cashflows.

A lot of this will come down to your real estate investment areas vs. stock market investment areas, amount of time needed to manage your investments, risk tolerance, and some luck. I think historical data favors paper investments over real estate for the long-term. I've seen articles showing the S&P returning about 7-8% YOY while real estate is historically between 2-3% appreciation YOY when viewed at a national scale in the US.

There are also some RE investors who seem to know where the next hot place will be before most others do and have the resources to buy tons of land and sell to developers for 2-10x what they paid for it, and still other fast-followers and long-term investors who will buy one of the first homes built in a new development as an income property and can reap 2-5x price appreciation plus someone else paying the mortgage in a good school district. Others will get caught underwater if they lose their job, the local area goes to hell, and/or the landlord can't find renters who will pay the full mortgage amount.

I've thought long and hard about real estate, but believe I waited too long to pull the trigger in my area, prices are too sky-high even with low interest rates to guarantee a good return, I am not currently handy enough to gain significant sweat equity if there were major problems with an "income property", and a 2nd mortgage for a young couple with a kid on the way isn't a smart fiscal or time investment unless the market craters again.

I personally love the time/stress freedom that comes from having diversified paper investments that I can largely set and forget, research a few unknowns that got thrashed recently to see if it's a bargain or a dud, and generally make a good return. These investments don't demand more time than I want to put into them, and I don't have to take on a part-time job to manage tenants and a 2nd property.

In short, study your area and you'll be fine whether you want to put in extra time and energy for RE or paper investing.

Thanks u/stoppedlurkinglol, u/workmanstan, u/rscar77. While I didn't get an answer (and additional research gave me lots of people insistent on their choice paper vs. real estate, without any real consensus), you did give me some more things to chew on.

You may find these links helpful:

• "How to handle $"
• Investing wiki page

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