Real estate is historically a robust long-term investment. In the US, homeownership is an elevated goal for many people. For some, extending that pursuit to add additional property becomes the foundation of their wealth accumulation strategy. And it's no wonder since buying and holding real estate can be a path to success.
The answer depends on your perspective and the timeframe you evaluate. The respected Case-Schiller Home Values Index reports that over the extremely long-term period from 1890 to 2005, the average home value increases only beat inflation by one percent. With inflation averaging about 3.1 percent over the last hundred years1, that equates to an annual appreciation of slightly above 4 percent. As most people know, individual multi-year periods during the preceding century have enjoyed significant increases and difficult losses. Whether you consider real estate a good investment may depend on when you buy and sell.
According to Bankrate.com, the S&P 500 index reports that commercial real estate offers an average annual return of 9.5 percent, compared to 11.8 percent for a REIT. Bankrate cautions that calculating ROI for any investment category is subject to distortion depending on the time and other variables employed.2
Direct investments in real estate can provide other benefits besides value appreciation. For example, real estate may offer an opportunity for income and tax benefits. When you own investment property, you can deduct expenses, including mortgage interest, property taxes, and operating costs.
Owning residential or commercial property usually means dealing with tenants. For example, suppose you are a small investor in charge of your own administration. In that case, you get the weekend calls about plumbing and potentially the nightmare of repairs after an irresponsible tenant moves out. Commercial property challenges are often less urgent (since, in most cases, the tenants go home at night) but can still be very demanding and labor-intensive. While you can outsource the challenge by hiring a property manager, that will reduce your profit.
Investing in a REIT (Real Estate Investment Trust) may offer the profit potential of owning investment property without the headaches. REITs are real estate stocks. A REIT owns, operates, and manages commercial property. The REIT sponsor chooses the investments and manages the tenants. The investors are not responsible for the tenants or property operations. To maintain their tax-advantaged status, REITs must distribute at least 90 percent of their income to the investors. This requirement often means that the investors receive income from their investment and may also benefit from appreciation.
REITs have very high historical returns, and like other securities, REITs have lower entry costs than buying real estate directly. Investing through a REIT also eliminates the need for hands-on management, and publicly traded REITs are typically liquid with an accessible market. Unlike many alternate investment vehicles like DSTs, you don’t have to be accredited to invest in a REIT.
1 Inflationdata.com, “Cumulative Inflation by Decade.”
2Past performance is not a guarantee or indication of future results.