“Make your money work for you.”
It’s the investment cliche we’ve all heard, and while it may seem over- simplified, old adages are usually true; this one is no different.
Instead of having your money waiting in a savings or checking account where it sits virtually unchanged (and actually loses value due to inflation), most people choose to invest at least some of their finances. For many, this simply means stock portfolios and mutual funds, which are reliable, consistent, and convenient ways to grow your money.
But for others, real estate investment is their favorite option. Although it involves more work, greater risk (generally), and higher initial investments, investing in real estate can create a stable foundation of reliable, profitable investments.
So how does real estate investing compare to other options? As you’ll see, there is more to a real estate investment that basic returns…
Real Estate Investing vs Other Investments: What’s the ROI?
Let’s start with the most important factor for investors: the money! Sure, there are other elements to be considered, but when it comes to investing in real estate, people want to know how much they can make, which is usually calculated in ROI, or Return On Investment.
ROI is simply a performance measurement for evaluating investments, and it’s one of the most reliable ways for creating an apples-to-apples comparison between investments that are extremely different, such as comparing stocks vs real estate. To calculate ROI, you simply take the final profit and divide by the initial amount you earned.
For example, if you purchased a boat for $10,000 and sold it for $12,000, RIO would be calculated as such: $2000 (the profit) divided by $10,000 (initial investment). 2,000 / 10,000 = .2, or 20%.
While not perfect, this system allows investors to compare certain forms of investment while keeping many of the factors consistent.
So, how does real estate perform as an investment? It all depends on how you manage the property, the terms of the mortgage (assuming a loan was used for the purchase), and how much you charge for rent. According to MashAdvisor, a return of 6 to 8% is considered a good investment, but many real estate purchases far outpace this number. For example, Investopia says that 20-year returns on commercial real estate have outperformed the S&P 500 index, averaging about 9.5%. Residential real estate appears to do even better, averaging 10.6%, but real estate investment trusts actually perform the best, with annual returns of 11.8%.
And there is always the potential (certainly not the guarantee), for even higher returns. According to an infographic from Attom data solutions, posted by RealtyTrac, the best areas in the country can yield returns over 20%. Their data shows that East Stroudsburg, PA had an average “gross rental yield” in 2017 of 24.5%. The four other areas listed showed returns over 20%, including another with a yield over 24%. To be fair, these are the exceptions, not the rule. They are the top-earning areas according to this information, so you likely can’t expect returns that high, but it does show that real estate investing certainly has the potential to be a strong, lucrative decision.
So what about other investments?
Stocks: 10%, (7% accounting for inflation)
Let’s start with stocks, an area that has significant debate on average returns. According to sources such as The Simple Dollar and Investopia, the average return for stocks has been 10% over an extended period. If you account for inflation, the number is actually 7%.
Commodities: Varies Drastically By Product
We won’t go to in-depth on the details, but investing and trading in commodities can be a risky but profitable venture. This high risk makes commodities, which generally are physical items such as oil, metal, and agriculture products, a chance for investors to make a lot of money but also lose a lot when not handled properly. (And no, you don’t have to physically store or handle the items.) Commodities are generally considered the most volatile asset class, and it’s not uncommon for prices of commodities to double in a short time and plummet shortly after. A lot depends on what commodity you are trading in, but according to U.S. Global Investors, the top returns in 2018 was in aluminum, which had a ROI of 18.59%, while coal was slightly over 17%. Copper was at almost 7%, while the rest of the listed commodities gave a negative return. The worst was zinc, which had a -25% return.
Bonds are issued by companies and governments to fund certain projects, so when you buy a bond, you are basically getting a fancy IOU that will be repaid, with interest, at a certain time. According to CNN Money, government bonds have a return of roughly 5 to 6%.
This is simply a contract between you and an insurance company that lets the company use your money and in return they make regular payments; they are popular for retirement savings and other purposes. A study from Annuity Gator found the range of return was 5.5% to 1.2%, with an average ROI of only 3.27%. An article published in Forbes says that even the best annuities return slightly over 4%, so this is appears to not be a high-return area.
Final Verdict: Real Estate is Great, But Requires Risk Tolerance
The final conclusion should be that while real estate is an excellent investment, it takes patience, dedication, and a strong understanding of the market to make a strong return. With stocks, for example, you can simply hold a portfolio and do little to nothing with it; as long as it’s making money, all is well. The same can’t be said with real estate, which needs your constant attention to make a profit.
Real estate also requires a significant initial investment, which can make joining the ranks of real estate investors more difficult. That said, if you think you would enjoy owning investment properties, make sure you have mortgages on those properties that works for your needs and budget.
Contact the team as San Diego Purchase Loans and we’ll do what we can to help you start a wonderful investment-property portfolio with a top-quality loan!