And doesn't this vary by area as well? I'm in NJ, and RE and property taxes are ridiculously high. A whole year's rent just covers property taxes in some cases, it's not even paying the mortgage or barely paying it. A 300K house rents less than 2K/month w/property taxes in 7-9K. Would you consider real estate rental to be worthy in this case? Or would you pick stocks?
Varies by region, neighborhood, national RE market situation, etc etc. (My very simplified example) During the middle of the downturn (2009-2011) I picked up three bank foreclosure SFR's I then turned into rentals. It took between $2k-$6k each to get them to a good condition. They were quickly rented and gave me an average positive cashflow of ~$400/month/property (after property tax, insurance, mortgage, property management). For the three properties combined, it was approximately $75k for the down payments, closing costs and repairs. They returned an immediate $14.4k annual cash flow (19.2% return!!!).
I can not find a deal today anywhere close to as good. Property prices have doubled but rents have gone up maybe 10%-20%. If I try to buy in the same area now, I would have a clear negative monthly cash flow.
That said, it is certainly easier to rent for cash flow in some areas over others. Some areas (NY/NJ/DC) with high property tax, high property cost and mediocre rent make it almost impossible to get a positive return. I'm just trying to point out you can stay in the same area but have a significantly different situation year by year.
Also, if you are trying to compare versus other long-term investment vehicles (such as an index fund) you have to do a lot more research and include a bunch of factors. Property appreciation, rent appreciation, paying off the principal, tax implications, vacancy rate, maintenance, etc etc. When I did the above properties, I only considered the monthly cash flow. 5 years later, the cash flow has almost fully returned everything I put into the properties. However, the principal reduction adds about another $27k, I get to depreciate the buildings which helps lower my taxes and, most importantly, the properties have appreciated in value by more than all the other benefits I listed, combined. :O
For my example, my real estate returns FAR FAR FAR outstripped what I would have received in an index fund. However, that national real estate market was an abnormal situation.
* Real world example but greatly simplified
Plus real estate rentals are a lot of work. The time and effort you put into it could be used for working more hours or doing more Mustachian things to cut costs. Investing in index funds is pretty simple and doesn't take long at all, no hours of research, labor, maintenance, etc. There's too much variability to account for.
Property managers solve this. I pay about 7% of the monthly rents to the property manager. In return, they do a very good job researching tenants and solving problems (if you do your research and pick a good property management company). In the example above, I included the property management costs.
And correct me (since I'm not so familiar w/real estate) but aren't real estate prices being propped up by the Fed buying mortgages through Freddie/Fannie Mae? (it's what Shiller said but I want to know your opinion)
Close but I think that's a bit off. In my opinion, real estate prices are being propped/driven by the current low interest rates. The largest determining factor of mortgage interest rates is the 10-year Treasury Bond. When the Federal Reserve was buying bonds through Qualitative Easing (QE), it drove down the interest rates. Now that QE is over and the Fed is talking about raising some of the other interest rates they directly control (fed discount rate), 10-year Treasury (and thus mortgage rates) should start rising as well. When those rates rise, I think the overall RE market will stagnate or even deflate. Depends how quickly rates rise.