The most accurate way to look at the returns on real estate is to look at the publicly traded Real Estate Investment Trusts (REITs). There are two general classifications of REITs: Equity and Mortgage. Equity REITs buy properties and manage them for profits. Mortgage REITs lend money to investors who buy real estate. According to the National Association of Real Estate Investment Trusts, the average annual returns on REITs during the period 1972 to 2019 are as follows:
- All REITs: 11.78% annually
- Equity REITs: 13.2% annually
- Mortgage REITs: 9.4% annually
Obviously, if you want to invest in a REIT, it makes more sense to invest in an Equity REIT, due to the higher historical average return. However, if you want to become a sophisticated REIT investor, you should realize that almost all Equity REITs invest in only a single sector of the real estate market, e.g. office buildings or apartment buildings. Investors, especially institutional investors, want to be able to tailor their exposure or spread their exposure to specific segments of the real estate market; they can do this by buying into a REIT that only invests in shopping centers, for example.
As a beginning investor, you will not have enough money to buy a properly diversified portfolio of REITs along with a properly diversified portfolio of stocks. You will be able to diversify safely by investing in a mutual fund that holds all of the S&P 500 stocks, including a good number of real estate stocks. Diversity is the key to reducing risk.