There are many emotional factors associated with real estate ownership. Do the historical returns on real estate investments justify the faith many investors place in them?
Land ownership is deeply rooted in the human psyche. Land is seen as a solid and permanent investment. The American dream has long included owning your own home, but when you go beyond this natural motivation to call your own and look at real estate as more than just an investment opportunity, how does the picture change? Let historical returns on real estate investment be measured by the confidence gained.
The answer is a cautious yes. In the year Between 1926 and 1996, the average annual rate of return on real estate was 11.1%. At the same time, the inflation rate was around 3 percent. So, it’s clear that buying real estate was a better investment than burying it in a pool in your backyard. However, returns for small-cap stocks were slightly higher at 12 percent, while the Dow Jones Industrial Average was 10 percent lower. These figures suggest that real estate investments are on par with stock market investments.
Real estate investors may want to make the case that land ownership and its value as an investment predates the stock market by thousands of years. They point to the role that land ownership played in determining wealth and aristocracy in the Middle Ages. This is true, but in many ways irrelevant to the discussion of historical returns on real estate investments. The new global economy has created a completely new playing field and the return on investment must be determined within this framework. It’s all well and good to study the past for clues about the future, but in investing, the past provides clues, not answers.
A look at historical rates on real estate investments shows that they are more stable and less likely to rise in erratic and unpredictable fashion than the stock market. Many investment advisors have at least 10% of their portfolios invested in real estate to protect against market fluctuations. On the other hand, real estate investments tend to have higher transaction costs and in larger units. All properties are unique and each has its own characteristics and potential.
These negative factors have led to the popularity of real estate investment trusts through real estate investment trusts (REITs). REITs are a type of real estate mutual fund that provide investors with a way to invest in real estate without the high transaction costs or hassle of asset diversification. Whether you’re considering real estate investing individually or through a REIT, the track record should give you some confidence. As much as past performance can be a guarantee of future success, real estate’s past has proven to be a safe, sound and high-return investment.