It seems to me like buying an investment property is almost always a bad decision, because 1) single properties are very volatile, 2) you generally have to put a very large chunk of your net worth (sometimes even >100%!) in a property that’s completely undiversified, and 3) renting out a property is work and you likely could get a better hourly elsewhere.
The only advantages I see are that there’s far more cheap leverage available to retail investors in real estate than other sectors, and mortgages can act as a savings commitment device. Are there other reasons I’m missing that explain the apparent popularity of these investments?
Good decision is relative to your capabilities. If you have no financial education, and you live in a country where 99% of financial advice is scam, buying an investment property is easy to understand and relatively less likely to go wrong.
That basically describes me before I started reading Less Wrong. The property I bought 20 years ago is still mine and generates some passive income. With other investments, where I tried to do smarter things, the money evaporated. Only recently I learned enough (and the situation in my country changed enough) that my investments actually make money. So, considering the situation I was in back then, buying the property was the right choice.
Another thing to consider is if you have children and you know that one day they will need some place to live, and no one knows how expensive houses will be. So you buy something today, rent it for a decade or two, but the idea is that it will be for your children one day.
In addition to the much greater availability of retail loans, there are often substantial tax advantages available compared with other investments. For example in Australia: the ability to deduct interest payments for investment properties as an expense offsetting all income (not just income derived from the property) to determine taxable income. So in addition to the loans being easier to get and having lower interest rates, they’re effectively lowered further by the investor’s marginal tax rate.
There is also a substantial discount (50%) on capital gains tax for holding the relevant assets for more than a year, which applies to rental property more naturally than many other leveraged investments.
I think it is lower perceived risk and stability returns. However, your take prompted me to do some investigation of the relative performance of (median indexes of) property prices in notably expensive western cities over 10 years. And I was surprised by just how much Gold Bullion and an S&P500 index fund out performed median house prices—so, thank you, this made me change my mind. Those two are probably more volatile than housing prices, but it’s only short-term, so really that seems noise over the overall performance?
I’d need to do a more thorough investigation. I’m only looking at median prices of residential a handful of cities, and that can obscure a lot of trends localized to certain suburbs, and I’m not sure how other types of investment properties look in comparison. But the preliminary research has radically differed from my assumptions.
The only advantages I see are that there’s far more cheap leverage available to retail investors in real estate than other sectors,
In Australia this is certainly a reason, but indirectly. See the “Negative Gearing” controversy. High income individuals buy leveraged investment properties, then claim a loss which reduces their taxes.
Did you look only at changes in median prices (capital gain), or did you include a rental income stream as well? You would need to make allowance for maintenance and various fees and taxes out of that income stream, but it usually still exceeds the capital gain.
I only looked at the median prices of residential properties from 2015 to 2025. Particularly because of the whole “flipping houses” meme. It would be interesting to see how the cost/reward ratio of flipping houses compares to other asset classes, including long-term rental investment properties.
It seems to me like buying an investment property is almost always a bad decision, because 1) single properties are very volatile, 2) you generally have to put a very large chunk of your net worth (sometimes even >100%!) in a property that’s completely undiversified, and 3) renting out a property is work and you likely could get a better hourly elsewhere.
The only advantages I see are that there’s far more cheap leverage available to retail investors in real estate than other sectors, and mortgages can act as a savings commitment device. Are there other reasons I’m missing that explain the apparent popularity of these investments?
Good decision is relative to your capabilities. If you have no financial education, and you live in a country where 99% of financial advice is scam, buying an investment property is easy to understand and relatively less likely to go wrong.
That basically describes me before I started reading Less Wrong. The property I bought 20 years ago is still mine and generates some passive income. With other investments, where I tried to do smarter things, the money evaporated. Only recently I learned enough (and the situation in my country changed enough) that my investments actually make money. So, considering the situation I was in back then, buying the property was the right choice.
Another thing to consider is if you have children and you know that one day they will need some place to live, and no one knows how expensive houses will be. So you buy something today, rent it for a decade or two, but the idea is that it will be for your children one day.
In addition to the much greater availability of retail loans, there are often substantial tax advantages available compared with other investments. For example in Australia: the ability to deduct interest payments for investment properties as an expense offsetting all income (not just income derived from the property) to determine taxable income. So in addition to the loans being easier to get and having lower interest rates, they’re effectively lowered further by the investor’s marginal tax rate.
There is also a substantial discount (50%) on capital gains tax for holding the relevant assets for more than a year, which applies to rental property more naturally than many other leveraged investments.
I think it is lower perceived risk and stability returns. However, your take prompted me to do some investigation of the relative performance of (median indexes of) property prices in notably expensive western cities over 10 years. And I was surprised by just how much Gold Bullion and an S&P500 index fund out performed median house prices—so, thank you, this made me change my mind. Those two are probably more volatile than housing prices, but it’s only short-term, so really that seems noise over the overall performance?
I’d need to do a more thorough investigation. I’m only looking at median prices of residential a handful of cities, and that can obscure a lot of trends localized to certain suburbs, and I’m not sure how other types of investment properties look in comparison. But the preliminary research has radically differed from my assumptions.
In Australia this is certainly a reason, but indirectly. See the “Negative Gearing” controversy. High income individuals buy leveraged investment properties, then claim a loss which reduces their taxes.
Did you look only at changes in median prices (capital gain), or did you include a rental income stream as well? You would need to make allowance for maintenance and various fees and taxes out of that income stream, but it usually still exceeds the capital gain.
I only looked at the median prices of residential properties from 2015 to 2025. Particularly because of the whole “flipping houses” meme. It would be interesting to see how the cost/reward ratio of flipping houses compares to other asset classes, including long-term rental investment properties.