1-2% returns on rentals is far too low (REITs return ~12% and require no headache) but even if that was true, housing is one of the few places where a "Regular Joe" with just a little bit of research can actually gain a market advantage and "beat the market". I can link you properties right now that can be bought and instantly rented for 15+% returns with no work and >20% with some fix up work. This is possible because of 1. easy to access leverage vs. other asset types and 2. difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient. If I had to guess, the reason you are seeing 1-2% returns is because you are looking at really "hot" markets where the prices reflect an assumption of future appreciation.

Look at average of all REITs, VNQ. It'll return about 3% dividends plus appreciation (roughly inflation over the long term ~ the last 10 years have been a bit of an anomoly). After tax 3% ends up as 2%. And these are the Pros they know what they're doing.

If your using leverage then you're playing a very risky game and just as the upsides are very high, the downsides are equally higher if not more.

Properties that rent 7%+ are very high risk areas where you could easily loose much of the principle. And, you need to look at the percentage return on the total investment after all expenses. After all that, you need to multiply it by .7 because it's considered income.

There are people who this for a living, who know far more about it than anyone else. They run REITS.

I mean, just look at the total returns for REITs. yes, there's some that have dividends as high as 5% up to even 10%, I even have some of them in retirement portfolio but I expect they'll loose some of their principle as any REIT with such a high dividend probably would. Just read any financial review and you'll see that anything with a dividend above 10% is highly suspicious or Risky.

This guy knows real estate.

It isn't an efficient market. Efficient markets have very little to no alpha. Real estate has been my best side job ever. Currently looking at a 40% annualized returns since 2015. All thanks to the same principals used to invest in public fixed income and equities.

> difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient

What exactly is stopping House Flipping BigCo from doing what you're proposing at scale?

Housing asset management only scales linearly because you need several people to physically inspect/validate each property before purchase to make sure there are no serious issues.

Also you need to assess the rental conditions for each property on a case by case basis, and contract everything out to property management.

A lot of REITs invest in medium-large sized complexes to avoid the potential headaches. I’ve lived in a few of these and found them to be quite well managed.

Property is a decent investment, commercial and industrial you can expect to see nice returns and all expenses are pushed to the tenant. When renting homes, its usually about getting your tenants to pay off the mortgage and then you have excellent monthly recurring revenue streams, of course you can then sell your 100k+ assets whenever you want.

I wouldn't recommend property as a decent investment for most compared to a total stock market ETF.

You have the risk of the location becoming undesirable (lots of places in the US with stagnant or declining property values), you have the risk of bad tenants, you have the risk of being liable for the tenants in case something happens (even though you have insurance, they can always sue you), you have the risk of maintenance issues in the house requiring costly repairs. Etc.

Some reasons I think people like housing as investment: They can use relatively safe leverage to increase the return on equity by three or four times. There are large tax incentives. There is the time value of money aspect where you pay off a fixed amount over 15 to 30 years. Also, housing is a hard asset unlike stocks or bonds.

Also, housing is effectively a "free" investment.

You must have a place to live and you are going to be paying for that. Why not own it so that your payments actually accrue capital while you're at it?

Building equity has opportunity cost. There's little financial incentive to pay off a mortgage unless the ROI elsewhere is less than the mortgage rate.

I think this a piece that a lot of people miss. Last year I was spending about 1.8k a month in rent. Now I pay 1.9k for a mortgage of which 300 (and increasing) goes directly into home equity. Once home equity comes into the equation it becomes pretty basic math

Yes, but what about property taxes, maintenance, transaction costs (6% to sell!) and opportunity cost of your down payment.

I've run the number in the past and in some markets it's clearly cheaper to own than rent (typically where there is slow but steady increases in prices - mid-west US). For other markets, you need 3-5% asset price increases just to break even with renting after 10 years (bay area).

My landlord was definitely losing money (on a cash flow basis) renting to me in Toronto -- rent did not cover mortgage interest + condo fees + property tax.

He was just gambling on real estate appreciation and using me to cover most of his carrying costs; I would rather gamble on stocks.

usually investment expenditures can be tax deducted, so your landlord is also using this expense as a way to lower his tax rate. It's effectively transferring income tax into capital gains tax (which presumably is lower and more efficient).

By making the rent slightly lower, the landlord is sure to get a renter to cover most of the costs. But if the economic situation declines (or interest rates rises), he can just bump up the rent to cover the increase.

When the rates in bank for anything over 500k is 0.1-0.2% per year -> 1-2% from renting sounds like an amazing deal.

Rates in US banks are 1.7%+, and there is considerably more risk involved in renting a residence rather than having cash deposited in an FDIC insured bank account requiring a considerable premium. Also, if the home investment is on the time horizon of 5+ years, I can't see many homeowners outside of hot real estate markets (which is a gamble) beating a total market index fund, if you factor in labor, time, tenancy and home maintenance risk, and the fact that the US government is going to bail out the public equity markets no matter what.