Great primer on the risks involved in direct investment in real estate (albeit less so on investing via REITs).

There are several things that can help reduce your costs and thus your risk:

• Rather than going out to find an investment property, consider renting out your current home when you move, rather than selling. This typically gives you a lower mortgage interest rate, you know the neighborhood and how well it does in the rental market, and you know the condition of the property so you’re not risking massive unexpected repairs.
• Consider buying a duplex or quad, living in one portion and renting out the other(s). This again gives you a benefit in terms of mortgage interest rates, and it’s much easier to stay on top of things.
• Find a good management company that charges less. The one I use typically charges 8% of rents, but cuts that down to 6% if your rent is above a certain threshold.

There are other benefits that you allude to but don’t explore in depth.

• It’s easier and less risky to leverage than stocks (as long as you keep making mortgage payments, nobody will bother you if your property value temporarily goes under the mortgage balance — no margin calls which you’d if you leverage and your stocks decline too far)
• While real estate returns are historically only about 4%/year vs. about 9–10% for stocks, if you only put down 20% of your own money, your leveraged return for real estate would average about 20%/year. After inflation this works out to about 17% for real estate vs. 6–7% for stocks.

In short, there are solid reasons why investing in real estate is a good idea, but as in all investments, it’s crucial to know what you’re investing in, and accept and mitigate the risks through proper diversification.