Why would asset diversity be considered prudent rather than being an incompetent means to chase mediocre returns?
It's not necessarily high leverage, since you don't know anything about the person's balance sheet. It matters a lot more how much (and what type of) debt the person has, not so much how much debt the real-estate has. Their monthly debt payment to income ratio may be low for example, such that the mortgage isn't a problem at all (and it's an inexpensive way to borrow while inflation is high and mortgage rates are well below that rate of inflation, which is a historical oddity for the US).
Diversification-as-mantra is for people that don't know what they're doing and don't know where to focus. This is what morons on television preach, and other pop investment experts, because they too have no idea what they're doing, they just know that spewing out "diversify" won't get them fired and it seems safe (mediocre returns are anything but safe).
The typical person is incapable of being an expert at many asset categories. It is possible, over time, to become an expert at one or a few however, including real-estate. If you acquire competency at real-estate investing, it will pay off handsomely over time (as with equity investing). Unless you're born wealthy or acquire a lot of money in some other way, you're going to start off buying one property. Certainly one can reasonably debate the amount of down-payment to start with on that first property, depending on personal finances.
The most prudent investment path is to focus on an area narrowly, concentrate at becoming good at a thing, develop as much skill at something as possible. That competency is your safety, not diversification (which is primarily useful when you have little to no skill and need to spread your investments around widely because you don't know what to focus on to generate superior returns for yourself; this is why someone like Warren Buffett advises the average person to just buy a low cost index fund, it's because they're incompetent investors ill suited to managing anything on their own - they simply do not have the skill to do so - and the index fund provides relatively safe generic diversification in the stock market, and the matching returns for that as well).
Asset diversification is important because we don’t get the average expected return from a portfolio, we get the actual returns from only one roll of the dice.
Since you can be foreclosed upon and walk away, your downside is capped at the money you put into the property (and however much you value your credit rating for the following seven years). Your upside isn't strictly capped. So for certain high-earning, low-net-worth individuals (say, a 22yo programmer), the expected value for such a risk is high enough that there's a good argument for rolling the dice.
only in non-recourse states, of which there are twelve. if you don't live in one of those, the downside is still capped, but it's the full purchase price of the house.
it's not a good idea to yolo invest like this unless you really know what you're doing.
True, but those twelve comprise a large portion of the country (mainly since they include Texas and California).
Honestly, in most states your greater risk is likely that a renter just stops paying and you have limited or slow recourse options. But like most undiversified investments, it's possible everything could go to zero (see Detroit).
Right now, you can borrow a large amount of money (larger than pretty much any other loan type) at a low fixed interest rate and pay the bank back less than what they loaned you in inflation-adjusted terms. It's basically free money at this point, and one if the reasons I don't sweat my rapidly deflating salary as much as I otherwise would be.
Oh yeah - that's generally a horrible investment compared to the market as a whole. In essence, you end up losing so much of your profit through taxes and you've managed to take on a business now that requires your time. Land lording is generally a terrible investment unless it's done at a scale and professionally. Not saying you don't make money on it - but that same money is probably better in an index fund for 30 years.
Because in the long term, property values can only go up, given the political power of NIMBYs, all levels of government bending over backwards to protect paper wealth of boomers, and low interest rates.
