Many individuals recognize that investing in some shape or form is a vital part of a strong financial plan. Real estate in particular has long endured as a cornerstone of wealth creation and stability because of the stability of property across economic cycles.
Although short-term market fluctuations can occur, real estate often is a premier long-term investment vehicle because of inflation protection, cash flow generation and other favorable dynamics. Just taking a look at real estate’s historical performance can help illustrate why it can be such a winner.
According to long-term data from the U.S. Census Bureau and St. Louis Fed (FRED), the median sales price of homes sold in the U.S. grew from approximately $23,000 in 1970 to more than $420,000 in recent years. That average annual appreciation rate outpaces general inflation. Real estate builds equity steadily over decades, regardless of temporary market dips. In fact, real estate property values and rental incomes typically rise in tandem with an increase in the Consumer Price Index. As the cost of living rises, the value of real property typically adjusts alongside it.
Another advantage to real estate is its leverage enables investors to amp up their returns in a way that few other asset classes will allow. An investor can get into the real estate market and purchase a high-value asset with a relatively minimal investment of a 10 or 20 percent down payment. A landlord uses tenant funds to pay down the mortgage principal over time while equity is building in the interim. The benefits are similar even if a homeowner lives in the property. Data from the Federal Reserve Boards’ Survey of Consumer Finances routinely reveals that the average homeowner’s net worth is more than 40 times greater than that of a renter, driven largely by home equity accumulation. Also, homeowners can deduct mortgage interest and property taxes and exclude capital gains when selling, offering other financial benefits renters do not receive.
Real estate offers impressive returns in multiple ways. The National Association of Real Estate Investment Trusts notes that public equity REITs often deliver an average annual total return of investment greater than 10 percent over many years. This is similar to performance of broader equity indices like the S&P 500, but with a lower risk of volatility.
Whether one purchases a home as a primary residence to watch equity grow; invests in a rental property as a solid income source; or buys into REITs, real estate has a proven resilience that can help build wealth.
