What is the Historical Annual Rate-of-Return on Real-Estate Investments?

9.4% – 10.5% …maybe.

Anyone can cherry-pick and alter numbers of expected returns based on website choice, experience in a diversified market, and what type of real estate invested in.  The market as a whole seems to generate an average number around 9% – 11%.  Realize that average number means that there are some that make much more and that some lose everything!

Using the market as a whole may provide you with fallible data as there aren’t any guarantees and there are many different investment opportunities, strategy’s, and options.  So where do we start?

The National Council of Real Estate Investment Fiduciaries (NCREIF) shows the average 25-year return for private commercial real estate properties held for investment purposes slightly under-performed the S&P 500 Index as of the organization’s May 9, 2019, report at 9.4%.  But…residential, diversified real estate investments, and REITs came in a little bit better, averaging 10.5%.  With the S&P’s average return of 9.8%, investors will look at real estate and try to compare the returns but will forget about some important distinctions.

TAXES are going to kill your investment portfolio if not managed correctly.

How much of your investment money do you get to keep AFTER TAX?

The IRS doesn’t want you to know how much of the money they are taking from you.  In my book, “Single Seat Investor,” I show how paying $5,000 in less tax each year amounts to millions of additional retirement dollars.  The money that you keep after tax is one of the MOST IMPORTANT reasons to invest in physical real estate.  Real estate investors, both passive and active, look for metrics to justify their investment decisions but there are some important distinctions regarding the type of real estate as there are many ways to make money in real estate: office, retail, industrial, multi-family apartment communities, land, and miscellaneous.  Each type of real estate has its own strategies and not all are one-in-the same.  Additionally, there is a certain amount of patience that goes along with investing in physical real estate because you usually can’t buy and sell property like shares in your online trading portal.  Some properties need time and it may take 1-2 years before collecting profits depending on the business plan.

According to Investopedia, “Private commercial properties returned almost as much as the S&P 500 over a 25-year period as of March 30, 2019.”

How much are you going to make from purchasing apartment complexes?  There are many factors that drive what an investor would expect to make based on market volatility, asset class, city and job growth, sub-market fundamentals, and a myriad of other factors.  For simplicity sake, let’s take a quick look at the pros and cons to different forms of real estate investment vehicles.

If you are going to be taxed on your investment returns, factor in the 20% loss!

Different Forms of Real Estate Investments:

  • Physical Property (office, retail, industrial, multi-family apartments, single family homes, land etc.)
  • Real Estate Investment Trusts (REITs) & Real Estate-Traded Company Stocks
  • Mutual Funds
  • Exchange-Traded Funds (ETFs)
  • Tax Lien Certificates

Physical Property

  • Pros
    • Tangible property that you can put your hands on
    • Rental income
    • Legal depreciation schedules that protect your cash flow
    • Positive tax implications to ward off the IRS (the equity you own in an investment may protect much, if not all, of your cash-flow)
    • Historical appreciation (don’t count on this happening but it is nice when it does)
    • Leverage in the form of equity owned and conservative bank leverage
    • Diversification outside of Wall Street
    • Not tied to securities markets
  • Cons
    • Not a liquid investment
    • It may take more time and effort if you are the only person running the investment
    • The city and sub-market you buy your property in may not support the returns you thought it would
    • If you are a passive investor, the people, sub-market, or deal could go sideways without the correct business plan and Power Team™. (The Power Team™ is outlined in my book Single Seat Investor)

REITs and Real Estate-Traded Company Stocks

  • Pros
    • More liquid than physical property (easy to buy and sell)
    • Required by law to pay out at least 90% of net income in the form of dividends
    • Less hassle
    • Not as much capital required to invest as in physical real estate
  • Cons
    • You don’t own equity in any specific deal
    • Payout of 90% of the REIT limits future growth in acquiring and renovating new properties
    • You pay capital gains taxes on your earnings unless you roll them into a dividend reinvestment plan (DRIPs)
    • If you roll your earnings into a DRIP, you have $0.00 to fund your living expenses
    • Riddled with fees
    • Taxed as ordinary income as the dividends aren’t considered “qualified dividends” (as high as 20%)
    • Potential conflicts of interest within each fund if private
    • Remaining solvent requires REITs to cut dividends when income falls and increase in times of rising profit = fluctuating income
    • Share prices can drop when property values fall
    • Share prices can fall with the broader stock market based on supply and demand of shares
    • High dividend payouts for REITs force management to take on debt to expand real estate holdings
    • Sensitive to interest rate fluctuations and rising interest rates (inverse relationship to Treasury yields)

Mutual Funds

  • Pros
    • Professionally managed pool of investments that are spread across several asset classes and investment vehicles
    • More liquid than physical property
    • Less hassle
    • Not as much capital required to invest as in physical real estate
  • Cons
    • Prices are linked to closing prices of the securities in the fund’s portfolio
    • Invests in REIT stocks, real estate related stocks, or a combination of both which doesn’t allow a targeted and focused allocation in a specific asset class
    • Fees, fees, and more fees to run the investment
    • The mutual fund may make money even if the fund doesn’t make you money
    • Share prices are tied to markets and securities that aren’t directly tied to real estate

Exchange Traded Funds

  • Pros
    • REIT ETFs spread risk across multiple REITs potentially limiting risk
    • Invests in securities offered by public real estate companies
    • Real estate funds can provide value through appreciation
    • Low expense ratios
    • Exposure to equities, currencies and other assets at different sectors
    • Dividend yields that are reinvested immediately if an “open-ended” ETF
    • Some offer options and shorting
  • Cons
    • Lower dividend yields because ETFs track a broader market
    • Potentially more tax efficient than mutual funds
    • Commissions can erode your investment returns (e.g. FEES…)
    • May have smaller volume which increases higher bid-ask spreads
    • Some are taxed higher (e.g. ETFs that hold precious metals)
    • Leveraged ETFs use financial derivatives and debt to amplify the returns of an underlying index thereby increasing risk of failure

Tax Lien Certificates

  • Pros
    • No Loan Against the Property…maybe
    • Land unwanted by the owner that they don’t mind offloading
    • Hassle free once you buy the tax lien
    • Potential to bid at tax deed auctions to purchase property from individuals that had their property go into probate court
    • You might find a property for under market value
  • Cons
    • You could become an owner of an unwanted property that doesn’t cash flow and costs you a lot of money
    • Competition to find the right deal as a newbie investor
    • The property and structure may require expensive repairs
    • There may be environmental issues on the property thereby limiting what you can actually do on the land
    • Inability to obtain a clear title
    • You may inherit outstanding liens that you are required to pay off
    • Foreclosure risk
    • Lack of liquidity during ownership prior to pay-out
    • Worthless property – if you don’t intimately know the market and sub-market you are bidding in, you may purchase or be part of many unwanted and un-profitable deals

CAUTION Passive Investors

Apartment syndicators, i.e. the active partner running the deal, can drive the rate of return higher on paper by failing to raise money at the outset to cover costs associated with the business plan.  If the apartment community that is being purchased requires a lot of capital improvements to force the value higher, usually done by renovating some or all of the property, but the active partner doesn’t raise money at the outset to cover these costs, it will be difficult to raise rents or to run the deal correctly.

I have a close friend that works in the accounting section of an apartment syndication firm that told me that their company bought an apartment complex and was counting on a phase-based approach for renovations.  There were 6 or 7 buildings on the property and the plan was to move out all the residents 1 building at a time, renovate that 1 building, and then raise rents for the new tenants coming in.  The plan included collecting rents from the other buildings in the community to help fund the on-going renovations.  Once they moved the tenants out of the first building to start renovations, the ENTIRE complex of residents moved-out within a one-month time-frame leaving them with $0.00 in cash-flow.  All of this could have been avoided by raising money for the renovations ahead of time.

The important lesson here is that the rate-of-return on paper would have been lower for the passive investors in the deal because the amount of up-front money that would have been raised would have been higher but the risk would have been vastly lower.  Raising the money to run the business plan, up-front, is very important as a property can quickly move to foreclosure due to lack of cash reserves.

2020 outlook amid covid-19

Multifamily cap rates could potentially drop with property values continuing to rise due to solid fundamentals driven by: increase in foreign capital, increased allocations in commercial real estate, and lower cost of debt.  If looking at the entire market, it is difficult to paint an accurate picture as states with rent controls will adversely affect the rates of returns in specific markets.  Current markets with rent controls are California, New York, and Oregon, with Washington, Illinois, and more restrictive controls set to be enacted in California.  What these markets need is more supply and less rent control.

If you want a more in-depth discussion on what a cap rate is, go HERE in this blog.


Stocks can drop and companies can go out of business rendering paper investments worthless overnight.

Sticks, bricks, and mortar are a tangible way to grow your Proactive Wealth™.  If you don’t know what that means, my book, “Single Seat Investor” is available for purchase on Amazon Prime for less than $10.  This short book is easily read in 60 minutes and all proceeds are donated to support the Anna Schindler Cancer Foundation.

Buy the book here on Amazon Prime and start your path to financial freedom and WEALTH today!

Please feel free to comment below or contact me HERE with any questions.