Historical Returns
Stocks, by way of conventional wisdom, is known to outperform every investment vehicle from a long-term perspective. The S&P 500 has a 50-year historical average return of roughly 8 percent. In the past 10 years (2010-2020), the annual rate of return of the S&P 500 is at 13.6% per year, according to Goldman Sachs.
For traders who are trying to time the market, picking individual stocks may be quite rewarding. There are many stock market winners, these are companies who perform well above the pack. One recent great example is with TSLA, a company who went up 766% this past year 2020. Looks tempting right? But, here is the caveat – according to statistics, over 80% of these traders fail, 10% break even and only 10% make money consistently.
Real estate, based on US data of median home values over the past 20 years, have appreciated about 3.9% per year. With this information, you probably would question – why would I even consider investing in real estate when the returns are so low?
The first thing to realize is that the above-mentioned data is obtained using house prices in general, the majority of it are primary residence homes; not investment-grade properties.
Currently, there is no efficient and accurate way to gauge investment returns from individuals who actively invest in real estate because this type of date is not available publicly. The closest comparison we can use for performance of investment real estate are equity REITs (Real estate investment trusts). Equity REITs are publicly traded entities that allows you to buy shares into commercial real estate investment portfolios. More on REITs here.
Surprisingly, side by side comparison of REITs vs Stocks show that REITs actually have outperformed stocks on longer time horizons periods – 20 of years or more. This is against the more commonly perceived notion that stocks outperform real estate investments.
| Year | S&P 500 | FTSE NAREIT ALL EQUITY REITS |
|---|---|---|
| 1994-2019 (25 years) | 11.9 % | 12.6 % |
| 1999-2019 (20 years) | 7.7 % | 13.3 % |
| 2009-2019 (10 years) | 13.6 % | 13.2 % |
This table shows the potential of real estate investments, even when done passively. When done actively, investors can enjoy even more benefits including significant tax breaks and active control over the investments. REITs are known to purchase low risk, stabilized assets with little upside, they typically avoid extensive value add projects. Most active investors easily beat these returns by targeting distressed properties with huge upside and using various tools like leverage and forced appreciation.
How much is the upside when investing in real estate actively? If for stock market traders, getting a home run is being able to ride a company that goes up 766% like Tesla, for real estate investors – it is INFINITE returns. This means that the investor has no money on the deal, and still own 100% of the property. How? Use the BRRRR method!
With all these reasons, I believe investment properties should always be a part of a well diversified investment portfolio. Investors who do not want to actively manage their real estate assets can still invest by forming partnerships with other active investors.
More questions about real estate investing? Contact us!