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Fund is less work. Real estate is physical, inflation resistant, a way to diversify, and uses leverage. Real estate can beat the index fund average for return over time, but yes it is work. You can have it managed for you, but that cuts into profit.
Briefly, for a well-rented quality unit in a good area with strong annual appreciation, you are benefiting from (1) someone else paying your mortgage on the property // the equity gained with each mortgage payment (2) cash profits (less cash costs) (3) equity growth from rising home values (4) tax advantages (5) massive profit balloon if you hold long enough to pay down the mortgage.
That said, I don't think it's WILDLY better than index fund, assuming historically consistent behavior. But it is meaningfully better in some ways.
Coach
Earn w2 income, invest in a rental or two, unlock the bonus depreciation (it’s not simple), pay little/no income tax. Get appreciation. Cash flow isn’t the prize. Live in a state with no income tax. Also invest in index fund 15% for retirement. Anything extra fun money account that’s where I play options, crypto whatever. On your primary home you really want a fixer if you are handy. You unlock 250k single/500k married tax free capital gains, but you have to live there for 2 years. To maximize that you need maximum appreciation (the fixer) and have it turn over every 2 years. Real estate is largely tax avoidance for me. I also use real estate to set my remote work location saving me like 30k over my previous state. Being in one market you miss the advantages of the other. I’m up 0% on real estate this year, 80% of stocks. If I zoom out some of my real estate is up 5x over 10 years.
Subject Expert
Rental properties have some distinct tax advantages that index funds don’t have. There’s also more of an opportunity to buy undervalued assets and directly add value over time. The flip side to that argument is that sometimes things don’t go smoothly with a rental property (broken pipe, bad tenant trashed the place, natural disaster, HVAC goes out, etc) or appreciation / rent growth slows in the micro market that you’re in.
Just like any investment opportunity, anyone who has more information than the average investor can take advantage of an unbalanced market in their favor. I find that’s far easier to do in real estate than it is with securities.
Coach
Not to be understated, they call real estate an imperfect market. Resurrecting someone’s abandoned vacation home, fixing a trashed rental, off market deals, were all my best money makers. Having access to data like schools, crime, projected appreciation helps me make better decisions over a first time home buyer. I have a distinct advantage. In the stock market I’d be looking for insider information, but that’s not legal for us. Only congress is allowed to do it legally.