Is Real Estate a Good Investment?

I've had a lot of people ask me whether or not residential real estate is a smart investment. Of course the question is usually couched liked this: "I only invest in real estate because it is the best investment, don't you agree?" Because I'd rather not ruffle too many feathers I usually just respond "it depends." The bottom line is that we just experienced a decade long real estate boom. No one wants to listen to anyone say that residential real estate should just be a home, not a retirement plan and certainly not the place to keep your entire nest egg. Three years from now I suspect this will be an easier conversation.

Instead of giving you my own long winded thesis on home ownership I will just refer you to a couple of charts and a great article from David Crook. Mr. Crook (great name eh?) is the Editor of the Wall Street Journal Weekend Edition and is the author of a great book entitled "The Wall Street Journal Complete Real-Estate Investing Guidebook." He's a smart guy, I just wish more people would listen to what he has to say. You can and should read the article in its entirety here. To whet your appetite check out this graph from the article.


I always say why present a case with words when you can accomplish much more with numbers. Well below you will find two graphs. Click each one to enlarge.

This first graph shows the annualized rate of return to stocks and real estate over 5 years from 2001-2006.

This second graph shows the annualized rate of return of stocks and real estate over thirty years from 1976-2006.
Remember, investing is about strategic asset allocation, rebalancing and time invested. The last time I checked most assets move in cycles. Over the past decade real estate has boomed, which tells me that real estate returns should revert to their longer term average over the next cycle. However since you live in your home it is hard to "rebalance" it as a part of your overall portfolio and perhaps even harder to make unemotional financial decisions about it. Therefore real estate should be a part of your investment strategy/retirement plan, but it probably shouldn't be your entire investment strategy/retirement plan. Remember diversification across asset classes works because we simply can't predict which asset class will outperform over the next 5-10 year period. If we knew that then we would sell all of our other investments and buy that one asset and hold it for 5-10 years.

I would love to hear comments or suggestions.