For years, real estate was considered a sound investment by the public.  While the recent bubble certainly over-hyped the asset class’s potential, real estate’s investment potential was already widely known.  And then came the crash.  First, residential real estate prices tanked.  Homes that had steadily appreciated for their owners over the years suddenly lost value.  And not just a little.  Homeowners foolish enough to have taken out interest-only, subprime mortgages faced devastating rate increases, skyrocketing the foreclosure rate and fueling higher unemployment (which in turn led to more foreclosures).  And then the commercial real estate market started to go south…

Even now, in the early stages of what I hope is a robust recovery, real estate is an investment few want to own.  Sure, there are a few savvy investors who view this as an opportunity to load up on quality properties at bargain prices, but by and large real estate seems to have lost its luster.  Just as everybody “knew” real estate was the quickest way to riches just a few years ago, today everybody “knows” real estate is a high-risk investment with more losses to come.

Real Estate’s Long-Term Performance Record

Likewise, everybody “knows” that anybody still exposed to real estate during the crash was wiped out.  And yet look at these returns for the Vanguard REIT Index Fund (VGSIX):

1-Year 3-Year 5-Year 10-Year
CAGR 59.04% -13.44 0.59% 10.54%

That’s right, over the last decade commercial real estate as represented by publicly-traded REITs has returned just over 10% per year, even including the recent crash.  Long-term buy-and-hold investors seem to have done just fine in all this.  It is the speculators and short-term traders who lost big.  Which camp do you belong to?

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