Real estate and alternatives: honest about the work and the fees

Rental property: leverage cuts both ways, and landlording is a job

Rental real estate has a genuine advantage over a fund: you can borrow most of the purchase price at a fixed rate, and the tenant helps repay it. That is leverage, and the arithmetic is symmetric in a way sales pitches rarely mention. Put $60,000 down on a $300,000 house. If the house rises 10%, that $30,000 gain is a 50% return on your money. If it falls 10%, you have lost half your equity, and you still owe the whole mortgage. Leverage multiplies the outcome, whichever direction it goes, and unlike a fund you cannot sell one bedroom to raise cash.

The second omission is the labor. A rental is a small business with tenants, turnover, repairs, vacancies, insurance, and law. The IRS treats it that way: rent, advance rent, tenant-paid expenses, and forfeited security deposits are all taxable income, against which you deduct repairs, insurance, professional fees, and depreciation, and losses may be capped by the passive-activity rules (IRS Topic 414). Property management costs a meaningful share of rent, which is what converts a job into an investment; count it before you buy, not after. A rental suits someone with cash reserves, a market they know, and a stomach for midnight phone calls. It does not suit someone who wanted an index fund with better stories.

If the real question is your own house rather than a rental, that is a different calculation entirely: run both paths in rent vs. buy.

REITs: the passive route into the same asset class

A real estate investment trust owns income-producing property and is required to pass nearly all of its earnings through to shareholders: “most REITS pay out at least 100 percent of their taxable income to their shareholders,” per the SEC. A publicly traded REIT fund buys you a slice of thousands of buildings, priced daily, sellable in a minute, with no tenants of your own. Two honest caveats: REIT dividends “generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends” (SEC), which makes REITs a textbook candidate for a tax-advantaged account (see tax-aware investing); and a broad total-market index fund already holds REITs, so an extra allocation is a deliberate tilt, not a missing ingredient.

Non-traded REITs are a different product wearing the same name. The SEC’s bulletin is blunt: fees “can represent up to 15 percent of the offering price, which lowers the value and return of your investment”; the shares are illiquid, often for a decade or more; the REIT “may use offering proceeds, which includes the money you invested, and borrowings to pay distributions”; share values may not be estimated until 18 months after the offering closes; and external managers can be paid on acquisition volume rather than on your results. A high advertised distribution funded partly by your own deposit is not a yield.

Gold, commodities, and the assets that pay nothing

Gold has no earnings, pays no interest, and collects no rent. Its entire return is whatever the next buyer will pay. That is a structural objection, not a moral one: a business reinvests and compounds, a bar of metal sits. Over 1900 to 2024, world equities returned an annualised 5.2% real, against 1.7% for bonds and 0.5% for bills, and one dollar in U.S. equities in 1900 grew to $107,409 in nominal terms by the end of 2024 (Dimson, Marsh and Staunton data, reported by Cambridge Judge Business School). Metals and commodities earn their keep in a portfolio as partial inflation hedges and diversifiers, not as engines. Ecclesiastes 5:10 saw the other risk from a long way off: silver does not satisfy the person who loves it.

Crypto: speculation, called by its name

Crypto assets may be legal to own and interesting to study. They are not, in any ordinary sense, an investment: there are no earnings to value, so the price is set purely by what the next buyer will pay. The SEC’s investor alert says investments in crypto asset securities “can be exceptionally volatile and speculative,” that the platforms involved “may lack important protections for investors,” and that the risk of loss “remains significant.” A common guardrail for anyone who buys anyway: size it as entertainment money you can lose entirely, never the retirement account, never borrowed. The full case is in behavior and speculation.

Why “alternatives” get sold to you

Notice which products come with a phone call. Nobody is commissioned to sell you a broad index fund at the roughly 0.05% a year those funds average (index funds and diversification has the figures). Private placements, non-traded REITs, structured notes, managed futures, and gold coin programs share a profile: high upfront costs, weak liquidity, opaque pricing, and a story that flatters the buyer for being sophisticated. Some are legitimate. The screening questions are the same for all: What are the total fees, in dollars, in year one? When can I get my money out? Who is paying the person recommending this? What does this hold that my index funds do not?

“He that tilleth his land shall be satisfied with bread: but he that followeth vain persons is void of understanding” (Proverbs 12:11, KJV). The land still needs tilling; the neighbor with the sure thing still needs ignoring. This is general education, not a recommendation of any specific property, fund, or asset.

Try it yourself: open the interactive tool for this lesson.