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Income Producing Real Estate Investment Outperforms Stocks and Bonds

11 August, 2018

Income Producing Real Estate Investment Outperforms Stocks and Bonds

Evaluating real estate investment to see how it really measures up over time compared to stocks and bonds can be tricky, in part because the value and potential for appreciation varies so much from one property market to the next. Still, when it comes to fixed income producing investment properties such as vacation homes, apartment buildings and other types of rentals, the results are crystal clear: Residential real estate offers the best returns, averaging more than 7 percent annual return on investment.

Stocks and Bonds vs. Real Estate Investment

According to a recent study titled, “The Rate of Return on Everything”, which was conducted by a team of economists from the University of California Davis, the University of Bonn and the German Central Bank, real estate investment has significantly outperformed equities (the stock market) and other fixed income investments like bonds and Treasury Bills. The massive study looked at 16 advanced economies over the past 145 years, comparing stock market returns with residential real estate investments and short-term treasuring bills, as well as longer-term treasury bonds.  

Returns on Investments in 16 now-wealthy Economies from 1870 - 2015

This study is important because researchers remembered to adjust for inflation and evaluated all returns for each asset type, including dividend income and rental income, while also taking market growth and appreciation into account.

Rental income proved an important factor – roughly half of the returns on real estate came from rents, while the other half came from appreciation”, wrote Bigger Pockets.

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Stock Market Volatility

Stock Market Volatility

Equities and real estate also perform differently in various countries, especially when you are looking at long-term averages. Still, when you look at the risk-reward ratio to compare the risk and volatility of each, it’s clear all over the world that stock market volatility must be taken into consideration.

For example, equities can shoot up more than 20 percent, then take a nosedive and lose more than half of any gains in a relatively short period of time, but many investors don’t even become very alarmed. Over the last several decades this level of stock market volatility has become almost commonplace, but not so with real estate investing. In fact, when you evaluate the return on investment for real estate versus the stock market over the last 145 years, investment properties far outperform equities.

“Throughout modern history, residential real estate has actually boasted extremely high returns with low risk”, wrote Bigger Pockets.

Best Markets for Real Estate Investment

Best Markets for Real Estate Investment

The best markets for real estate investing can be found wherever demand for rental properties is high and even outpacing demand. Whether that means an apartment building located in a thriving university community or a vacation home rental in one of the world’s top tourist destinations, the key is to find a booming real estate market where there is still upside potential in the near term, combined with smart growth strategies and development plans for years to come.

Residential rental properties offer excellent returns with low volatility”, wrote Bigger Pockets. “If you invest well, rental income will start performing for you immediately”.

By investing in fixed income producing properties in a strong real estate market that is in demand but not overpriced, you can enjoy the cumulative effect of consistent rental income and rapid appreciation.

Do you have questions about real estate investing? Post them in the comments!

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Topics: Real Estate Investment Alternative Investments Stock Market