1. Invest in an index fund, which I deposit into automatically every month, at X% return and Y% risk.
2. Invest in a rental property, which I then have to spend time to manage (or pay someone to manage), at the same X% return and Y% risk.
I wondering how you're supposed to account for the difference between the two. Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.
I am not a finance person, but it seems you're talking about two possible investments. One in a rental property and one with your time. If you manage the rental yourself then there is an opportunity cost where your time may have been better spent somewhere else. If you pay to have it maintained/managed then you are free to invest your time in whatever you like. You need to figure out the value of your time to make sense of it.
The real issue is you won't know Y until afterwards.
> The observation that housing returns are similar to equity returns, but much less volatile, is puzzling. Like Shiller (2000), we find that long-run capital gains on housing are relatively low, around 1% p.a. in real terms, and considerably lower than capital gains in the stock market. However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude.
In other words, it's the rental yield, not the capital gains, that make up for the difference.
I'd also add the "past performance is no guarantee of future results" caveat. The time period studied was one of immense population growth, so in advanced economies with plummeting birthrates a different primary driving factor could take hold.