Is real estate a better investment than mutual funds?

[The Atlanta Post asks an interesting question, through a hypothetical situation:] It’s 1 a.m. and you are up late. You know that you should be in bed; but for some reason, you are still awake. So you say to yourself that if you watch a little late night television, you will eventually fall asleep. You know there is typically not much worth your time at this time of night, yet you watch anyway. You flip through the channels, and come across what looks to be the same live program on three different channels. Your curiosity gets the best of you, you decide to watch this evidently popular program, and you put the remote down. This program, you think, will be the one that will finally put you to sleep. And of course, you realize that you have seen this program before. The talking head says, “Buy my $300 course, and you can invest in real estate, set your own hours and retire early.” There are lots of ‘real people’ saying that they, too, bought the course and made money hand over fist and now they have the life that they dreamed of. But you know in your head that it can’t be that easy. If it was that easy, everyone would be doing it and it would not cost $300. But there must be, you surmise, something that you don’t fundamentally understand. Who would want to use their extra money to buy a headache? I can probably make just as much if not more in my company’s 401K or even my own mutual funds, you think to yourself.  And then I don’t work nearly as hard. As a matter of fact, some of these ‘real estate’ folks are probably on their way to “fix someone’s toilet at 1 in the morning. Is it really worth it?” The answer of course is yes and no. But there are some fundamentals about real estate that you need to understand before you decide that it is not worth what might be a little extra work. While there are different methods to use real estate as an investment, it will be helpful to clarify one which is typically the sticking point with most people. That is, to purchase a piece of real estate for the purpose of renting it to someone in order for them to live in it. The question then is, if you were to do that, how could that be better than just hanging on to your mutual fund? There are three advantages.

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