When investing you must learn from your mistakes and while not beating yourself up just because you couldn’t accurately predict the future. With that in mind, I want to talk about someone I know that recently turned $60,000 into $120,000 by investing in an illiquid real-estate venture. Obviously, I am very happy for this person, but I think this person could have done better simply investing in a brokerage account or IRA with much less hassle.
In 2007 this person entered into an agreement with several other local investors to invest in single-family rentals in their city. They deposited $60,000 into the venture then in 2022 they received $120,000 and exited the venture. If we annualize that return it is about 4.8%.
For context below are some returns of several portfolios and their performance from 2007 to 2022 YTD.
I am a big proponent of patience when investing. Had the real-estate venture been liquid in 2008 I think this particular person would have sold it at an inopportune time. This is exactly what they did with much of their mutual fund portfolio. This is often what hurts investors the most – impatience.
The reality is that if you are investing for the long-term you will need patience no matter the investment. Some investments like stocks and bonds are easy to jump in and out. Others like this real-estate venture are much more illiquid. When you invest with liquid items you need to avoid making rash decisions in periods of crisis. If you can remain patient and consistent you can often get great rates of returns with easy investments like mutual funds and ETFs, without the hassle of purchasing real-estate directly. However, some people do better with real estate largely because they are more likely to ride out the tough times. As this data below shows, the average investor does much worse than most good long-term investment assets primarily because they jump in and out at inopportune times.
In the long-run I think you can get very similar rates of return investing in basic investment accounts without the hassle of direct real estate investing. Direct real estate investments, even when using mortgages, tend to average around 9.5% to 11.7%. In my opinion it would be much easier to invest in a good mix of Real Estate Investment Trusts (REITs), Stocks, and bonds in a well diversified investment account. In an investment account you don’t have to worry about tenant horror stories like this. Would you rather mess with tenants or just have to ignore the tempting “SELL EVERYTHING NOW” button that is far too accessible in your investment account?
I know my answer.