There are many emotional factors related to real estate ownership. Do historical returns on real estate investments justify the confidence that so many investors have in them?
Ownership of land has been something that has become deeply ingrained in the mind of man. Land is seen as the only solid and permanent investment. The American Dream has long included owning your own home, but when you move beyond this natural urge to own a property that you can call your own and look at real estate purely as an investment opportunity, how does the landscape change? ? Have historical real estate investment returns measure up to the confidence you’ve 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 to bury cash in jars in your backyard. 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 would suggest that the real estate investments were there along with the investments in the stock market.
Real estate investors may want to claim that land ownership and its investment value predate the stock market by thousands of years. They will point out 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 it is irrelevant 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 the scope of this. It’s all very well studying the past for clues about the future, but in investing, the past only offers clues and not answers.
A look at the historical rates of return on real estate investments shows that they tend to be more stable and are less likely to go up and down 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 to 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 real estate investments 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 hassles of high transaction costs or uniqueness of property. If you are considering investing in real estate, either individually 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, solid and high-yield investment.