There are many emotional factors associated with real estate ownership. Do the historical returns on real estate investment justify the confidence of so many investors?
The ownership of land has been something that is deeply rooted in the mind of man. Land is seen as an investment that is solid and permanent. The American Dream has long included owning your own home, but when you move beyond this natural impulse to own property that you can call your own and look at real estate solely as an investment opportunity , so how does the picture change? Measure the historical returns on real estate investment by the trust it has earned.
The answer is a cautious yes. Between 1926 and 1996, the average annual rate of return on real estate was 11.1%. The inflation rate during the same period was around 3%. So, it was clearly a better investment than burying cash in a jar in your backyard to buy real estate. However, the rate of return for small stocks was slightly higher at around 12%, while the Dow Jones Industrial Average was slightly lower at 10%. These figures suggest that real estate investments were comparable to stock market investments.
Real estate investors may like to claim that land ownership and its value as an investment predates the stock market by thousands of years. They would point to the role that land ownership played in the determination of wealth and even nobility in the Middle Ages. Of course this is true, but in many ways irrelevant to the discussion of historical returns on real estate investing. The new global economy has created a new playing field and the return on investment should be determined within its scope. It is well and good to study the past to get clues to the future, but in investing the past gives only clues and not answers.
A look at the historical rates of return on real estate investments reveals that they tend to be more stable and less likely to move up and down in an erratic and unpredictable manner like the stock market. Many investment advisors recommend that all portfolios have at least 10% invested in real estate to hedge against market volatility. Real estate investing, on the other hand, tends 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 increased the popularity of investing in real estate through REITs which are real estate investment trusts. A REIT is a type of real estate mutual fund that gives investors a way to invest in real estate without the high transaction costs or problems of asset exclusivity. If you’re considering real estate investing, either on an individual basis or through a REIT, the historical record should give you some confidence. As much as past performance can assure us of future success, real estate’s past has indicated that it is a safe, sound and high-return investment.
