Reminder: This week I am giving away a copy of The Maui Millionaires. There is still time left to enter the random drawing. It’s easy.
The gurus tout real estate, real estate, real estate as the way to get rich. It’s perpetuated in the media, penetrating a number of people I know who generally speak intelligently. Yet, unless you’re in a special situation, over the long run real estate barely keeps up with inflation. Yeah, that’s not an inspiring, motivational thought for getting out there and buying a piece of land (or a piece of a building while someone else still owns the land).
Ben Stein has the facts, as usual.
[M]y wife and I bought our house in Malibu for $600,000 in 1990. It might have gone up by 150 percent since then, but in that span, the stock market has more than tripled on the Dow, counting dividends. Other indexes such as foreign stock indexes have gone up vastly more than that… [O]ver very long periods homes barely keep pace with inflation. Stocks, over very long periods, beat inflation by a large margin…
Stein admits that real estate has its place:
[Y]ou won’t make as much in the long run as you would on stocks, but no one I know can live inside a stock, make love inside a stock, read a story to a child inside a stock, or lie in bed reading next to their dogs in a stock. So, yes, real estate rules. It’s a good, even great, investment — just not the perfect investment.
You can make more money in real estate than the stock market if you do more than buy a house, live in it, and sell it later. Any sort of activity that might create profit, like flipping properties for a quick gain or looking for tenants to manage, introduces risk. On the other side of the coin, you can earn nothing in the stock market by buying at the wrong time, trading frequently, or following hot trends. There are an infinite number of variables that get in the way of achieving the long-term averages calculated after the fact with the help provided by 20/20 hindsight.
Updated February 6, 2012 and originally published January 23, 2007.