Today I’m sharing key findings from a 22-year study on investing in real estate.
In general, there are three primary ways you can invest in real estate:
- Direct ownership
- Listed real estate
- Unlisted real estate
Most investors agree that allocating to real estate is prudent.
But they don’t always agree on the best investment vehicle to use.
If you continue to wrestle with how to invest in real estate, you’ll enjoy the recent results I’m sharing from a 22-year study on this popular asset class.
How to Listen to Today’s Episode:
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Resources Mentioned:
- CEM Benchmarking Study [PDF]
- Summary of CEM Benchmarking Study [NAREIT]
- REITs Outperform Unlisted Real Estate Investments Over 21 Years [Think Advisor]
- U.S Housing Prices 1900-1996 and 1997-2019 [Carlson]
- Long Term Data on U.S. Housing Prices [Shiller]
- Real Estate ETF [Vanguard VNQ]
- Why Rent vs Buy is the Wrong Question [Jeremy Schneider]
Investing in Real Estate: Key Findings from a Comprehensive 22-Year Study
Taylor Schulte: Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm sharing some updated research on investing in real estate. In general, there are three primary ways that you can invest in this asset class.
Number one, direct ownership. This could be a primary home or investment property.
Number two, listed real estate like publicly traded real estate investment trusts or REITs.
Or three, private or unlisted real estate, like a non-traded REIT.
Most investors agree that allocating to real estate is prudent, but what they don't agree on is which vehicle makes the most sense. So if you continue to wrestle with how to invest in real estate, you'll enjoy the recent results that I'm sharing today from a 22-year study on this popular asset class.
For the links and resources mentioned, head over to youstaywealthy.com/135.
Real estate investment trusts, commonly referred to as REITs were established by Congress in 1960, and the purpose was to give all investors, especially the average American access to these income-producing commercial real estate properties that had previously only been available to large financial institutions and wealthy individuals.
The first REIT index was launched in 1972, and the first mutual fund came alive in 1985. Today, almost half of all American households own REITs in some shape or form, and collectively, the entire REIT market represents about $3.5 trillion across 500,000 properties here in the United States.
While REITs are often compared to residential real estate when having performance conversations there are some glaring differences. For example, by definition, a REIT is technically a company that owns, operates, or finances, income-producing real estate, and these REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, cell towers, and even hotels.
Quite different than a suburban home with a good school system in San Diego or Minneapolis or even South Carolina. As mentioned at the top of the show, in general, there are three ways the average investor can allocate to real estate. Number one is direct ownership, again, could be a primary home or investment property. Number two is listed real estate, real estate that's listed on an exchange like publicly traded real estate investment trust or REITs. and then number three, private or unlisted real estate. That's real estate that does not trade on exchange like non-traded reit.
I've covered residential real estate as an investment pretty good here on the show in the past. And while we're kind of comparing apples to oranges when benchmarking residential homes to commercial properties that REITs invest in, we're still talking about a physical piece of property here at the end of the day.
And if we're gonna talk about putting money into a physical building, residential homes should likely be in the mix. Just like stocks and bonds are very different animals, but still part of most traditional investing and allocation conversations.
As mentioned before in the podcast, one of the most common investing misconceptions is that national residential real estate is a good investment. For example, from 1900 to 1996, a 96-year timeframe here, the total real return, that's the return after inflation. The total real return of US housing was 10.7% or roughly 0.1% per year during that time period.
Now, times were of course, a lot different back in the early 1900s, so those results were maybe skewed a little bit, but still, if we fast forward and we look at a timeframe like 1997 to 2019, the total real return was about 57% after inflation, or roughly 2% per year for US housing, not that great.
It's very common to hear someone say, I bought my home for $500,000 and today it's worth a million dollars, and it's easy for that person to wrongfully conclude that they just doubled their money. When you factor in all the fees and expenses and taxes and even inflation, which primary homeowners don't typically do, you more often than not arrive at a different conclusion, perhaps not 2% per year, especially in today's current environment.
But it's hard to see primary home ownership as a good investment over long periods of time when you get out the spreadsheet and you crunch all the numbers. In fact, when Jeremy Schneider first appeared on the show, we dug into this in a lot more detail, and if you missed it, I'll link to his episode in the show notes, which again can be found at youstaywealthy.com/134.
Now, I will be the first to acknowledge that viewing your home as a good investment is very different than intentionally investing in real estate to earn a healthy competitive rate of return. But still, when you crunch the numbers and you factor in your time and all the expenses, flipping houses or buying rental real estate isn't always as easy or fruitful as most people think.
I'm not saying it's impossible. I'm well aware that people make a good living investing in real estate. So please don't send me hate mail here, but for the average American investor who has to compete with experts who are spending every waking minute working to find deals and, and make money in real estate, it's more challenging than most people assume.
The good news is that you don't have to compete with those experts, and you don't have to bear the burden of being a landlord to make money in real estate. And that's where REITs come into play as shared. There are two ways that we can invest in REITs as investors publicly or privately.
Investing in unlisted or private real estate often sounds more appealing, but thanks to a 22-year study by CEM Benchmarking, we're able to see the actual performance of each and start to make a more informed decision. And I say thanks to CEM benchmarking because the study analyzed the allocation and actual performance of investments in more than 200 public and private sector pension funds with almost $4 trillion in combined assets.
Finding actual real-life performance is something that isn't always easy when it comes to unlisted investments, which is one of the ways how these non-traded REITs get wrongfully sold to the general public. It's just not easy to see what happens behind the scenes day to day and get this.
According to the CEM benchmarking study, boring publicly traded real estate investment trusts return an average annual return of 10.7% while unlisted or private non-traded real estate produce an average annual return of about 8.7%, a 2% average annual outperformance by your boring publicly traded real estate investment trusts publicly traded REITs also provided better risk-adjusted returns during that time period.
In other words, investors were able to take less risk and achieve higher rates of returns. Interestingly enough, publicly traded rates only accounted for 0.8% of the $4 trillion that was invested by these large pensions in the study compared with 5.2% of assets in private real estate.
Again, investing in private unlisted real estate sounds opportunistic and more exciting, which is why they often attract more attention. But the returns over long periods of time rarely live up to investors' expectations. And it's not necessarily because these fund managers, these REIT managers, it's not because they're making bad investments. It's typically because these unlisted or non-traded REIT funds are just riddled with fees.
Front-end fees can be as high as 15%, meaning a $100,000 investment drops to $85,000 on day one of trading, and then ongoing annual fees can continue to eat into those future returns as well. When you compare the cost of investing in private real estate to publicly traded REITs through a low-cost index fund like the Vanguard Real Estate ETF VNQ, which costs 0.12% per year, it becomes pretty obvious why public real estate historically has been the better performer.
While most of you listening already knew that, I still found the study interesting on a number of different levels. For example, private equity ownership in a company that isn't listed on an exchange or a group of companies had the highest returns during the time period measured there are some legitimate reasons for that which I'll plan on covering in a future episode, especially since I don't think we've ever covered private equity here on the podcast.
But if you wanna read through the CEM benchmarking study in more detail, I'll link to it in the show notes along with a few other articles that reference some of the highlights.
But in summary, just remember that you don't have to read through and try to understand 100 pages of an unlisted real estate investment prospectus or even play landlord every day to get healthy after inflation returns and meaningful exposure to real estate over long periods of time. Sometimes the best solution is steering you right in the face. Publicly traded REIT funds like the Vanguard ETF VNQ, continue to provide investors like you and me, quick, easy, and cheap access to the real estate sector.
For the links and resources mentioned today, head over to youstaywealthy.com/135.
Thank you as always for listening, and I'll see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.