In of my previous posts I wanted to know reference the expected annualized return of real estate.  If I had to make a guess, I’d say real estate will return 5% based on conversations I’ve had with real estate agents, but I didn’t have any proof or statistical data to back it up.

I did some research and found a great scholarly article Contrasting Real Estate with Comparable Investments 1978 to 2008 by Jack Clark Francis and Roger G. Ibbotson.  Francis is a professor of economics and finance at Bernard Baruch College (NY) and Ibbotson is a professor at the Yale School of Management.   By permission, I have made it available on The Intelligent Investor.  

Over the course of 31 years, residential real estate has returned 5.68% compounded annually which includes price appreciation and the rent (or income) generated from the real estate.

This is an important number to know because unless you purchase at a steep discount (or premium) you will likely return 5.68% over an extended period of time.

While this is a far cry from the 10.84% annual return by the SP 500 during the same period, according to Francis and Ibbotson [2009], the market correlation is relatively low at 0.25 (a correlation of one is considered perfect, more on correlations).   This means real estate investments can serve as a good source of diversification from your stock investments (i.e., 401k or IRA).

I have thoroughly enjoyed reading Francis and Ibbotson [2009] and will likely continue to site more data from this source.  A moderate read (15 pages total), I encourage you to give it a shot.  Enjoy. 

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