The Uncomfortable Truth About Real Estate Investing

Introduction – Five Uncomfortable Truths About Real Estate Investing (0:00)

Brian: Shocking, real estate can be a great investment, but most people posting about it on Instagram and TikTok aren’t giving you the full picture. And as a financial adviser who also invests in real estate, I want you to be aware of both the good and the bad. So today, we’re going to be covering five uncomfortable truths about real estate investing so you can make an informed decision before investing your hard-earned money. And stick around to the end because I’ll also share one of the most dangerous traps I’m seeing in real estate right now.

Uncomfortable Truth #1: Real Estate Is Not Really Passive (0:30)

Brian: Let’s start with the biggest myth in real estate investing. People have this crazy idea that you buy a property, tenants move in, rent checks show up in your mailbox, and you go sit on a beach somewhere with a fruity beverage in your hand. That is not what rental property ownership looks like for most people, especially in those early years. In reality, owning real property comes with a huge hassle factor: dealing with busted HVAC units, screening applicants, dealing with late payments, and even navigating the legal process of evicting bad tenants. And that’s the first uncomfortable truth about real estate investing—it’s not really that passive. Among rental property with individual landlords, 80% self-manage their properties on top of everything else they also have going on in their lives.

Brian: Of course, you can hire a property manager, but for a single property, that typically costs somewhere between 8 to 12% of your monthly rental income. And for short-term rentals, those management fees jump up to somewhere between 15 to 40%. And you still have to manage the property manager. So, most real estate investing is not passive income. It requires time and skill, and you need to be willing to put in the work.

Uncomfortable Truth #2: Your Returns Are Often Overestimated (1:46)

Brian: The next uncomfortable truth is something you really want to watch out for because it can lure you into a bad investment. Let’s say you buy a $500,000 investment property and put down 20%. That’s $100,000 of your hard-earned money. And now, let’s say after the property appreciates 3% per year, after 5 years it’s now worth about $580,000. So, the property itself went up about 16%. But because you only put down a $100,000 down payment, that $80,000 increase in property value means you got close to an 80% return on your original down payment. That’s the power of leverage. And it’s helped successful real estate investors build significant wealth. But you also got to be careful because leverage cuts both ways. The same thing that amplified your gains will amplify your losses if property values ever decline or the property sits vacant.

Brian: Plus, you still have the debt regardless of what’s going on in the market. And the carrying cost on the debt combined with all the other expenses means the real net return is likely to be much less than you think. And that’s the second uncomfortable truth about real estate: your returns are often overestimated. Real estate can look great on paper, but you have to take into account these ongoing costs like property taxes, insurance, maintenance, repairs, the months it sits vacant, and even the big capital expenditures. I’m talking about those one-off things like the roof replacement, the HVAC units, the hot water heaters. So, you need to have pretty deep pockets if you want to invest in real estate. If the only way you can afford it is with OPM—that’s other people’s money—you’re just not ready for real estate.

Uncomfortable Truth #3: Real Estate Is Highly Concentrated (3:32)

Brian: The next uncomfortable truth about real estate investing is something a lot of folks don’t think about, or maybe they just choose to ignore, and that is it’s highly concentrated. When you own an S&P 500 index fund, you own a piece of 500 companies across virtually every sector of the US economy. If one company has a terrible year, you might not even notice. That’s called diversification. When you own a single rental property, you own one asset in one location. So, the value of your investment is largely tied to that specific market, its local economy, and even the regulatory environment of the local government—all things you don’t control.

Brian: A perfect example is what happened a while back with short-term rentals in New York City. People bought properties specifically so they could put them on Airbnb, built their entire plan around the short-term rental income, and then the city changed the rules and essentially shut it down. We see versions of this in college towns too, where investors try to rent to multiple students only to discover that local zoning doesn’t allow that many unrelated people in a single family home. So, the bottom line here: a single rental property is the opposite of diversification. That doesn’t make it a bad investment, but it needs to be done at the right time and sized appropriately within your overall financial picture. You don’t want a duplex to represent the bulk of your net worth before you’ve built a solid financial foundation.

Uncomfortable Truth #4: The Tax Benefits Are Overhyped (5:01)

Brian: Uncomfortable truth number four: the tax benefits are overhyped. One of the most common reasons people cite for getting into real estate is the tax benefits. Real estate gurus on TikTok love to talk about depreciation, write-offs, and cost segregation. They make it sound like real estate is an easy hack for paying little to no taxes. Now, look, there is some truth to this, and don’t get me wrong, there are definitely tax advantages that come with investing in real estate. But the version of this that circulates on social media is almost always the brochure version and not the reality. And there’s a big gap between those two.

Brian: For example, if you actively participate in managing your rental property and your income is below certain limits, you may be able to deduct up to $25,000 of rental real estate losses against your ordinary income. But that allowance starts phasing out once your modified adjusted gross income exceeds $100,000 and is generally gone by $150,000. And the more sophisticated strategies like cost segregation and accelerated depreciation on commercial properties are likely going to require you to be a full-time real estate professional or have enough real estate income to offset the large losses from the accelerated expenses. Neither of these are easy and can severely limit the benefits. So, the tax benefits are technically real, but definitely complicated, and they’re not as glamorous as the real estate bro on TikTok made them out to be.

Uncomfortable Truth #5: Real Estate Is Not Automatically Better Than Index Funds (6:30)

Brian: The next uncomfortable truth about real estate investing is one that might surprise you. Real estate is not automatically a better investment than index funds, but it’s not automatically worse either. The S&P 500 has had an average annual return of about 10% since 1957. Real estate can outperform that return, especially when you take into account the leverage if used wisely, but it’s not guaranteed. And I hate to be the one to break it to you, but real estate doesn’t always go up in value every year. Just look at median US home prices over the last couple of decades. The long-term trend is upward, but there were periods when things were down or even relatively flat.

The Most Dangerous Trap (7:12)

Brian: And it’s important to look at this from a historical context because it could help you avoid one of the most dangerous traps in real estate investing right now, and that’s your own recency bias. Here’s what I mean. From the first quarter of 2020 to the fourth quarter of 2022, the median home sales price rose 46%. You heard that right—from $329,000 to over $479,000. Even though prices have come down a little bit since then, a lot of people are now mentally anchoring to that as their baseline, assuming that kind of rapid appreciation is normal and will continue. But the concept of reversion to the mean is real. If the long-run average is around 4% per year and you just experienced nearly 50% appreciation, you cannot set your clock to another 50% run-up coming right behind it. So, it’s important to have realistic expectations and to acknowledge that your all-in return on real estate could end up being much closer to the return you’d gotten from those index funds, with more headache and a lot more hassle.

Closing – When Real Estate Makes Sense (8:21)

Brian: At this point, you might be thinking, “What do these guys have against real estate?” And the answer: absolutely nothing. Bo and I invest in real estate ourselves. Real estate can be a powerful part of your wealth building when done correctly and at the right time. Before you take on a leveraged, concentrated, illiquid investment like real estate, you need a strong financial foundation underneath you: a full emergency fund, no high-interest debt, and retirement accounts maxed out. This is the foundation that ensures that your pockets are deep enough to weather real estate volatility and even a bad tenant or two.

Brian: At that point, when your income and your investments have grown to a certain level, tax efficiency starts to matter more. And that’s often when real estate starts to make a lot of sense—not as a shortcut to wealth, but as a tool to help you grow and manage the wealth you’ve already built. That’s why we recommend investing in real estate no earlier than step eight of our Financial Order of Operations. If you get the foundation right first, understand the real risks, and go in with realistic expectations, real estate can be a tremendous chapter in your wealth-building story. If you want to go deeper on the complete Financial Order of Operations, check out this video right here that walks you step by step through the wealth-building plan that could change your life. And as always, keep building towards your great big beautiful tomorrow.