What has more risk? RE Investment or New Car Purchase?

[Jeff N.]

After reading a post on hear about "Do you tell your friends you invest in RE", I remember a comment someone made to me concerning RE investing a few years back.

This person found out I purchased a home as a buy and hold for rental income and made the comment, "Thats just too risky". Meanwhile this same person just purchased a new car at 42K.

Granted RE does have its risks, especially if you were caught up purchasing in overvalued markets the past few years. But what has more risk, purchasing a vehicle at 42K costing you $700/month for the next 5 or 6 years or purchasing a rental unit with 42K down netting you $400 month positive cashflow after expenses, plus the possibility of appreciation?

Granted your risks are limited with the car purchase, where the RE purchase has the potential of unlimited risks, but over the long haul I'm betting on the RE investment as a low risk investment.

[Jon Holdman]

In investing, "risk" has a specific meaning. Based on that meaning, the car is much less risky.

Risk, associated with an investment, refers to the range of possible returns. A bank CD or treasury is low risk because the return is well known. Short of a complete collapse of the US financial system, you're going to get back your principle and the exact return stated when you buy the investment.

A real estate investment or a stock, OTOH, has a pretty wide range of possible returns. So, this investment is higher risk.

A car has a well defined, albeit negative, return. You buy it. You put gas, oil, spare parts and labor into it, and in 10 years its worth nearly nothing. Pretty much guaranteed. So, negative return, but very low risk.