Dubai is famous for its high skyscrapers and lavish lifestyle, and owning real estate in the sunny Gulf city may sound like a non-affordable dream for many

Which is a better investment idea? Real estate investment vs stock market

Better Returns? Probably not. Bear in mind that on average, after inflation, real estate returns 0.4% a year, compared to a typical diversified portfolio return of 5%. (Is housing a good investment?) The typical price to rent ratio in the US is 15. That’s a 6% cap rate, or 6% return a year, if you manage to buy at 15 (in most desirable places like the San Francisco Area, it’s closer to 20, and in Palo Alto, CA, it’s 40 — those places are not good places to own income property). But you have to subtract mainteneance, property, and insurance, which is 2.5% per year, so now you’re down to 3.5% a year.

Less headache? Not really. I’m a current landlord and have had to handle phone calls from tenants who can’t do simple things like flipping a breaker switch, spray WD-40 on their window rails to unstuck a window, or even adjust the vents in the HVAC system. When I was working at a corporation, I’d sometimes have to leave work early to deal with this. It’s by no means a “passive business” like owning a diversified portfolio via say, Wealthfront. You have to list the rental property when your rental moves out. God help you if you need to evict a tenant, because that’s at least 3 months in which you will be collecting zero rent on the property.

What I find is that there are two types of people who think owning rental property is easier than owning a diversified portfolio:

  1. People who’ve never actually owned rental property and think all you have to do is collect rent checks.
  2. Real estate brokers, etc., who actively get paid a commission when you buy rental property.

And I say this despite owning two profitable rental properties (both self-managed), and of the last 5 years of managing rental properties, have had no bad tenants.

Two relatives of mine, by contrast have had nothing but bad tenants (they did not take any of my advice on how to screen tenants: Tips for running a rental business), and one of them recently turned their rental property over to me for management.

The net result is that despite being capable of running a good rental business myself, I would not recommend it for anyone else. Most people are as likely to be decent rental property managers as they are to be decent portfolio managers. The difference is that there are good automated wealth managers (Wealthfront, Vanguard, etc), while there is no way to automate rental property management.

See also: The Siren Song of Real Estate