Why Invest in Real Estate Over Low-Cost ETFs for Financial Independence?

Financial independence is a sought-after goal for many, and there are numerous ways to achieve it. While many opt for low-cost Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs), investing in real estate can offer unique advantages and returns. This article aims to compare both methods from different perspectives: returns, maintenance overhead, liquidity, and risk.

Introduction to Real Estate Investment

Real estate investment involves purchasing and holding property with the intention of generating income and long-term capital appreciation. This type of investment can be a solitary endeavor, as you can buy and own properties on your own, provided you have a reasonable budget and a solid plan. Buying and owning residential properties for long-term rentals can be a solid financial strategy.

Comparing Returns

Let's first consider the returns from both investments.

ETF Returns:

An average ETF return of 8% annually, when compounded over 30 years, will result in significant growth. For instance, an initial investment of $60,000 with no monthly input grows to approximately $603,000. However, this does not account for the possibility of ETF crashes if the underlying fund company faces serious issues.

Real Estate Returns:

In a scenario where you purchase a residential property for long-term rental, the property value and rental income can appreciate over time. Assuming a $240,000 property with a 25% down payment, a $60,000 mortgage, and a 30-year fixed mortgage, the overall cost, including maintenance and property tax, is estimated to be around $1,400 per month. Renting out the property at $1,850 per month with an annual increase of 4-8% year-over-year, the property's value is expected to increase significantly over 30 years. After 30 years, you will own the house, valued at around $1,827,000, without counting the earnings from rent over the years.

While it can be challenging to outperform the index funds with ETFs, especially given the current U.S. stock market trends, real estate investments show particular promise in growing markets like Austin, TX.

Maintenance and Overhead Costs

Both ETFs and real estate investments come with different maintenance and overhead costs.

ETFs:

ETFs have minimal maintenance costs, with an annual fee ranging between 0.1% to 1.5%. These costs are usually straightforward and manageable.

Real Estate:

Real estate investments require more significant upfront and ongoing costs. It is recommended to perform a full inspection and necessary repairs, which can cost around $1,000 to $2,000. Over 30 years, this totals approximately $60,000.

Liquidity

ETFs offer unparalleled liquidity. You can buy or sell them at any time, providing flexibility in managing your investments. On the other hand, real estate transactions typically involve more complexity and time.

ETFs:

For ETFs, liquidity is infinite. You can execute trades at any time, provided the market is open.

Real Estate:

Real estate transactions can take longer. From listing to closing, you might need to wait anywhere from one week to six months. The closing process itself typically takes about 30 to 40 days.

Risk Factors

Both investment types come with their own set of risks.

ETFs:

ETFs have the risk of the underlying fund company facing issues that could lead to a crash. Additionally, there is market risk, the risk that the entire market system might fail, leading to losses in your investments.

Real Estate:

Real estate investments are typically safer if you pay your property taxes and mortgage on time and maintain the property well. However, real estate is susceptible to natural disasters. Homeowners' insurance can provide coverage for most issues, except for earthquakes, which require additional coverage.

Conclusion

Both ETFs and real estate investments can help you achieve financial independence. While ETFs offer liquidity and ease of use, real estate offers higher returns and long-term stability. The choice between the two depends on your financial goals, risk tolerance, and investment strategy. Whether you choose to invest in real estate or ETFs, thorough research and planning are crucial to make the best investment decision.