There are many emotional factors associated with owning real estate. Do historical returns on real estate investments justify the trust so many investors place in them?
Ownership of land is something that runs deep 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 go beyond that natural impulse to own a property you can call your own and look at real estate purely from an investment opportunity, how can the situation changing? Have historical returns on real estate investing measured by the confidence 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, it was obviously a better investment to buy real estate than burying money in jars in your backyard. However, the small stock rate of return was 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 might want to claim that land ownership and its value as an investment predates the stock market by thousands of years. They will emphasize the role that land ownership played in the Middle Ages in determining wealth and even nobility. This is true, of course, but in many ways unrelated to a discussion of historical returns on real estate investments. The new global economy has created a whole new playing field and the return on investment must be determined within this framework. It is all well and good to study the past for clues about the future, but in investing, the past only offers clues and not answers.
A review of historical rates of return on real estate investments shows that they tend to be more stable and less likely to rise and fall in erratic and unpredictable ways 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 consist of 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 type of real estate mutual fund that offers investors a way to invest in real estate without the issues of high transaction costs or uniqueness of ownership. If you are considering a real estate investment, either on a one-to-one basis or through a REIT, the history should give you some confidence. As much as past performance can reassure us about future success, the history of real estate has indicated that it is a safe, solid and high-yield investment.