Let me know if you’ve heard of these real estate “truisms”
- Your home value will always go up
- There will always be demand for real estate
- Paying rent is like paying your landlord’s mortgage…
I was wondering why the internet was littered with so such hyperbolic promises that real estate is THE best investment evar, from Rich Dad Poor Dad to modern influencers like Sharon Tseung.
Here’s why I think real estate is so popular, through the lens of psychology:
Psychological reasons why real estate investing is all the rage
Reason #1: Property feels tangible.
It’s in the name, “real” estate.
Homes feel like something you can control in various ways. Fix it up. AirBnB it. Househack it. Build an ADU (what I’m doing…and it’s taking
forever).
Enter the stock market: one day you can wake up with your stocks pumping 10%, the next it could be down that much.
You can’t touch stocks, and products like index funds (my favorite) feel abstract.
This is why beginner investors liken the stock market to a casino. (Most people don’t understand that the general market has cycles, and the index has always gone up).
Reason #2: Scarcity
Real estate is seen as a finite resource, with a limited supply of land and properties available.
This creates a sense of urgency (and competition) among those who believe that owning a piece of real estate is a way to secure their financial stability.
It doesn’t help that the housing supply in many major metros is unnaturally restricted due to bad zoning laws and cost of construction.
Reason #3: Homes are emotional investments
If you think of “The American Dream,” I bet you imagine a white picket fence and a nice suburban house. Owning a home is deeply embedded in the psyche of Americans as signs of progress and what to strive for.
Real estate harkens back to something primal. This is your shelter, what does it say about you? People are much more sensitive with the pride of their home, than they are about their stock portfolio.
This is also where I think the biggest error of real estate investing comes from. Are you buying a home to live in and enjoy, or are you buying an investment?
Of course it could be both, but…many people buy homes just assuming it’ll become a good investment, and don’t actually run the numbers.
Given all these reasons, I don’t think it’s a surprise why most financial influencers will shit on renting and heavily encourage you to invest in real estate.
Wait a minute…but don’t you own a home Oz?
As a homeowner, I’m not against real estate as an asset class, and you could make money from it.
The operating word is could, just like you could make money from stock investing, starting your own business, or yes—even crypto.
But people don’t see behind the scenes of homes:
- Bad tenants Maintenance & fix costs.
- Contractors charge a lot.
- Bad property managers.
- Property taxes and phantom costs.
It’s curious how so many people tout real estate as a passive investment, when it can require so much active management.
In comparison, stock investing can be so passive, that most investors lose money by being too active (selling at the wrong time, picking individual stocks…).
The takeaway: measure twice, buy once
You can make money in real estate. But you should run the numbers and realize that, at least in the beginning, it is NOT a passive investment.
Hopefully my 3 reason rant gives you a framework to understand the emotional appeal of real estate investing, so you could take a more measured approach.
How 1 generation builds wealth is different from another generation
“Back in my day, you could get a whole meal under a dollar.“
The same person talking down to youths could, in the next breath, say:
Back in my day we worked hard at the same job for 40 years, bought a home and build a family. You should be able to do that too.
It used to be possible to buy a home while making minimum wage. That is just about crazy talk right now, with how inflated everything has become.
30 years ago, the average house price was only a few times the standard annual income.
Now it is 8.5 times the average income, according to CoreLogic data.
If you’re getting advice (admonishment?) from the older generation to buy real estate, it helps to realize they were playing Monopoly with a better set of rules.
And yet, to be completely fair…
Why some are doing worse financially compared to prior generations, another segment is doing dramatically better.
The trend? Tech-enabled creatives who leverage the scale of the internet to start businesses or launch new careers. Degree or no degree, you could build a six-figure internet business or suddenly go viral.
The future is here; it’s just not evenly distributed.
What’s fair is in the eye of the beholder
While it’s “unfair” that the economy treated earlier generations better, da yooths also have higher tech literacy and new opportunities that didn’t exist before.
Culturally, trends like the FIRE movement, childlessness, digital nomadism, minimalism and van life are not only more acceptable today, in certain locales they’re even lauded.
So hip. So alternative. Dream a new dream, and live it.