There are two main reasons one might prefer stocks (and bonds) over real estate for the small time investor.
The first reason is diversification risk. Houses are expensive, and unless you’re extremely leveraged, it is difficult to buy a lot of houses across a lot of different markets. If your small area takes a hit or something goes wrong with your single rental, you don’t have a lot of other investments to balance that out. It’s also more difficult to manage houses over a large number of markets than it is to just buy an index fund.
Now, you could just do a REIT, which is like stocks for real estate, but again, that’s focusing your money into one market. Having some REIT makes sense as part of your portfolio if you don’t own your own house, or your own house is a tiny portion of your overall portfolio. However, on average the REIT is going to match the stock market, so only focusing on real estate doesn’t trade off enough return for the lack of diversification.
The second reason is laziness. It is easy to buy and sell index funds. There’s always a buyer at market price. If you need to unload stocks quickly by a certain date to turn into cash, you can. You don’t need a good credit rating or the bank’s permission to do those kinds of things. You just need money or stocks.
Directly managing real estate lowers those transaction costs that you have with longer-distance diversified real estate, but also adds more hassle. You’re the one who has to deal with tenants, contractors, etc. It’s a pain.
In addition, there’s a time factor. Buying or selling an index fund takes no time at all. Directly owning investment real estate can take hours. Yes, your effort produces more value, but so would your effort in other directions. Some people enjoy the small business aspect of real estate, but I do not. I would rather earn more money through my day-job or other side projects.
Again, if you enjoy the process of buying and selling real estate, and you like dealing with repairs and tenants and so on, real estate investment can be a fun side project. But if you don’t get utility from such actions, index funds are just as good on average and take a ton less time and emotional energy.
Have you ever dipped your toes into real estate investing? Do you know anybody IRL who has done well with it? Any horror stories?