For many investors, real estate carries a timeless appeal. It’s tangible. You can see it, touch it, and rent it out. You hear countless stories of people building wealth through owning rental properties, flipping homes, or buying land that appreciates over time. And to be fair, private real estate can play a role in a well-diversified portfolio—particularly for those who are prepared for its risks, illiquidity, and time demands.
But at Mercer Partners, we work primarily with clients who invest in the public markets—stocks and bonds— which we believe represent the best long-term path to wealth creation, liquidity, and financial independence. While real estate appears incredibly compelling on the surface, it deserves a closer look before being treated as a core part of your portfolio.
What are the real tradeoffs between real estate and the public markets? Let’s break it down.
The Pros of Real Estate Investing
- Income Generation
One of the most attractive features of real estate is its potential to generate passive income. Well-managed rental properties can produce steady monthly cash flow, which can be especially appealing to retirees or those seeking financial independence earlier in life.
- Tangible Asset Value
Real estate is a physical asset, which provides a sense of security for many investors. Unlike stocks, which can feel abstract and subject to daily market swings, real estate can feel more “real”—literally and psychologically.
- Potential Tax Advantages
There are a number of tax benefits associated with real estate. Depreciation deductions, mortgage interest write-offs, and the ability to potentially defer taxes can all enhance after-tax returns if structured appropriately.
- Inflation Hedge Potential
Real estate has historically been seen as a partial hedge against inflation. As the cost of living rises, so too can rental income and property values—though this is far from guaranteed and highly dependent on local markets and demand.
- Control and Leverage
Real estate will give investors more control over outcomes. You choose the property, the tenants, the improvements. You can also use leverage—borrowing to finance purchases—which can magnify returns if things go well (but also losses if they don’t).
The Cons (and Why We Favor Public Markets)
- Illiquidity
Unlike stocks or ETFs, which can be bought or sold in seconds with a click, real estate is not liquid. Selling a property takes time, paperwork, fees, and a willing buyer. If you need capital in a pinch, real estate isn’t ideal.
- Concentration Risk
Most people don’t buy a “diversified basket” of properties. They buy one or two in a single market—exposing themselves to regional risks like job losses, natural disasters, or local regulation changes. Public equities, on the other hand, allow you to own hundreds or thousands of companies across geographies, sectors, and industries.
- Time and Headaches
Owning real estate means dealing with tenants, repairs, vacancies, property management, and ongoing maintenance. Even with a property manager, real estate is far from passive. There’s a reason it’s often called a “second job in disguise.”
- Higher Transaction Costs
Buying or selling a property typically incurs significant costs—agent fees, title and escrow fees, inspections, taxes, and more. Compare that to the near-zero cost of trading public securities, and it becomes clear how expensive real estate can be to transact.
- Lower Long-Term Returns (on Average)
Despite popular belief, real estate has not historically outperformed the public equity markets. According to data from the Federal Reserve and long-term research by economists such as Robert Shiller, the average U.S. home appreciates only slightly above inflation over time. Meanwhile, stocks have delivered annualized returns of 8–10% over the long term—even after accounting for volatility.
- Leverage Cuts Both Ways
While borrowing can amplify returns, it also amplifies risk. A downturn in the housing market, an extended vacancy, or rising interest rates can quickly erode equity—and potentially lead to negative cash flow or even foreclosure.
What About REITs?
Some investors turn to Real Estate Investment Trusts (REITs) as a way to gain real estate exposure without the hassles of direct ownership. Publicly traded REITs offer a more liquid, diversified, and passive approach to real estate investing, and they’re available right in your brokerage account.
While REITs can serve as a useful satellite allocation within a diversified portfolio, they are still subject to the same market forces—and often the same volatility—as traditional equities. In other words, they don’t offer the “protection” from public market swings that some investors seek in physical real estate.
The Bottom Line
We’re not anti-real estate. For the right person, in the right situation, real estate can add diversification, income, and tax benefits. But it’s important to recognize that it’s not a magic wealth-building machine. It comes with real risks, hidden costs, and active responsibilities that many investors underestimate.
At Mercer Partners, our philosophy is simple: own great businesses through public markets, stay diversified, maintain liquidity, and align your portfolio with your personal goals and time horizon. Real estate can complement this strategy—but for most investors, it shouldn’t replace it.
If you’re considering investing in real estate, let’s talk first. We can help you evaluate whether it aligns with your broader financial plan, risk tolerance, and long-term objectives. Just like any investment, it should serve your plan—not the other way around.
Best,
Nick
The financial professionals of Mercer Partners Wealth Management are registered representatives with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Mariner Independent Advisors Network, a registered investment advisor. mercer Partners Wealth Management and Mariner Independent Advisors Network are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
