Back in March I turned 26. While still very young, 26 is that age where your peers are doing more and more “grown-up” things. Getting married, starting families, starting/advancing careers. Recently one of these grown-up activities I’ve been asked about is investing in real estate. Is investing in a piece of income property a good idea? I am not an investment professional, and I by no means can offer an expert opinion or provide investment advice. What I can do is aggregate publicly available information and comment objectively on it, and I hope that is enough to help you make an informed decision about the above question.
First off let’s talk a short bit about investing. Investing is the act of moving money forward through time. You sacrifice dollars today for some more tomorrow, next year, etc. The goal is to have as much and hopefully more of that money in the future. That extra money usually comes in two forms of return: income and capital appreciation.
Now that we know about investing, we should talk about the options we all generally have for investing. This is usually in the form of government bonds, corporate bonds, stocks, ETFs, and our topic of the day real estate (which we will consider as a REIT, which is a real estate investment company that you invest in, as opposed to buying a physical piece of rental property). To compare these different options, we can typically look at two metrics, risk and return. Risk is measured as the volatility (standard deviation) of the returns. Total return is measured as the total percent gain or loss as well as any income in the meantime (dividends/coupons/interest). Below is a table from the 2016 Ibbotson Yearbook comparing the risk and return of these asset classes over the last 40+ years.
And here is a chart from the same source of what those metrics look like graphically.
One might look at these representations and think that real estate is a great investment. It is important to keep in mind that these returns are index averages, i.e. the average return over a large aggregate of similar investments; and that these are also over a very long holding period. What about year over year?
This chart from J.P.Morgan shows us that while Real Estate (shown as REITs) had lots of good years, it also had some pretty bad ones as well, and it doesn’t always come out on top.
Let’s consider our original question and think about what to make of all this. First, “Is real estate investing a good idea?”. Well, it certainly was a good idea if you started in 1972, but just because real estate did so well in the past doesn’t mean it will do so in the future. But notice Cash on the above chart; cash is almost never near the top of the list, and even when it is, the returns are so low as to be almost meaningless. So, the key takeaway here might be to not pick just one investment, but to just invest in general. Staying invested in a diversified mix of broad asset classes with demonstrated positive returns would be the best way to take advantage of a small piece of ALL the growth in each corner of the economy (globally too, if you include foreign markets). Before making your decision however, I strongly encourage you to reach out to your financial advisor for more information, especially if you would like to get more specific on the options you have within each asset class.
Hope that helps!