There are many emotional factors associated with owning real estate. Do the historical returns of real estate investments justify the confidence placed in them by so many investors?
Ownership of land is something that is deeply rooted in the mind of man. Land is considered the only solid and permanent investment. The American dream has long included owning your own home, but when you move beyond that natural impulse to own a property you can call your own and view real estate solely from an investment opportunity, how does the situation change? Make the historical returns of real estate investment live up to the trust it has received.
The answer is a cautious yes. Between 1926 and 1996, the average annual rate of return on real estate was 11.1%. During the same period, the inflation rate was around 3%. So obviously it was a better investment to buy real estate than burying cash in jars in your backyard. However, the small stock yield traded a little higher at around 12%, while the Dow Jones Industrial Average was a little lower at 10%. These figures suggest that real estate investments were there at the same level as stock market investments.
Real estate investors may want to claim that land ownership and its value as an investment predates the stock market by thousands of years. They will highlight the role that landed property played in the Middle Ages in determining wealth and even nobility. That’s true, of course, but in many ways unrelated to a discussion of historical real estate investment returns. The new global economy has created a whole new playing field and ROI must be determined within it. It’s fine to study the past for clues about the future, but when it comes to investing, the past only offers clues, not answers.
A look at historical rates of return on real estate investments shows that they tend to be more stable and less likely to rise and fall erratically and unpredictably like the stock market. Many investment advisers suggest that all portfolios have at least 10% invested in real estate to protect against market fluctuations. On the other hand, real estate investments tend to have high transaction costs and be in larger units. All properties are unique and each has its own characteristics and potential.
These negative factors have led to the popularity of investing in real estate through REITs which are real estate investment trusts. REITs are a kind of real estate mutual fund that gives investors a way to invest in real estate without the issues of high transaction costs or uniqueness of ownership. If you’re considering investing in real estate, whether as an individual or through a REIT, the track record should give you some confidence. As much as past performance can reassure us of future success, real estate’s past has indicated that it is a safe, solid, high-return investment.