Returns from single family homes over last five years

[SeattleCPA]

Just because we often discuss returns from single family homes, I thought this quote from this week's edition of the Economist interesting:

Between 2016 and 2021, annual returns from family rentals (of 21%) have outperformed those of housing for old folk (7%), offices (5%), shopping malls (-1%) and even apartments (12%), according to Green Street, another research firm.

It's going to be behind the payroll for many people, but here's the source: https://www.economist.com/finance-and-economics/2022/09/22/why-wall-street-is-snapping-up-family-homes

[PMJL34]

Hasn't SFHs always outperformed senior homes, offices, malls, and multis/apartments?

[SeattleCPA]

Hasn't SFHs always outperformed senior homes, offices, malls, and multis/apartments?

I don't know. But I wouldn't think so.

Just intuition, but I would guess like other asset classes, rankings fluctuate?

BTW over the same period, US total stock market earned 17%-ish?

[clarkfan1979]

Hasn't SFHs always outperformed senior homes, offices, malls, and multis/apartments?

I don't know. But I wouldn't think so.

Just intuition, but I would guess like other asset classes, rankings fluctuate?

BTW over the same period, US total stock market earned 17%-ish?

Comparing the different classes of real estate is interesting. However, comparing 21% of SFH to 17% stock market seems apples to oranges to me. I can provide some quick stats on my rentals and readers can decide. I will use June 2016 to June 2021 as my timeline.

Rental #1: Purchased for 182K with 20% down and 10K of rehab. From 2016 to 2021 it increased from 325K to 475K.
Rental #2: Purchased for 95K with 5% down and 16K of rehab. From 2016 to 2021, it increased from 210K to 350K.

Here is the part that makes the RE comparison different...

I did a cash-out re-fi (148K) on rental #1 in 2017 to buy rental #3 in 2018. Purchased for 603K (20% down) with 50K of rehab and is now 1.15 mm.

I did a cash-out re-fi (107K) on rental #2 in 2019 to buy current primary in 2019. Purchase price was 280K (20% down) and is now worth 380K. 

Some of the extra money from the cash-out re-fi's ended up in my Roth IRA.

[Dicey]

We purchased two SFHs in that approximate time frame. Per Redfin:

#1 purchased 11/2015 for $259k is valued at $562k as of 9/22.
#2 purchased 6/2016 for $335k is valued at $620 as of 9/22.

Both estimates align pretty well with very recent comps.

I would estimate we spent $10-$15k on each, prior to initial rental.

IMO, what's disingenuous with comparison to US Total Stock is that most people have some kind of balanced portfolio.

As to office space in particular, because of the pandemic, the current forecasts look fairly bleak, while demand for housing remains strong. Anyone who has purchased anything from Amazon knows that brick and mortar is in for a complete overhaul. I'm guessing that the sectors that will survive and thrive will be those that combine shopping with dining and entertainment.  Pay no attention to this thinking; my crystal ball is in the shop. It was getting cloudy and I found someone who swears they can fix it.

[Michael in ABQ]

Hasn't SFHs always outperformed senior homes, offices, malls, and multis/apartments?

To have a true apples-to-apples comparison you would need to compare something like REITs that invested in those different types of real estate. The return of a private investor actively managing a SFH rental property (or a handful of them) is not the same as an institutional investment in a 300-unit apartment complex that cost $50 million. Financing/leverage is different, the amount of work for the investor is different, etc.

There are also differences in risk. It's unlikely that you'll have to replace the roof of every single building in an apartment complex at once but a new roof on a single SFH could wipe out years of returns. Same with having one bad tenant that trashes a place and has to be evicted. Not nearly as big of a deal in a multi-tenant property.


I used to be a commercial real estate appraiser and while we usually looked at things in terms of all cash (i.e. a 7% capitalization rate on an investment property) investors looked at cash-on-cash yields assuming a typical 60-75% financing. I knew of many sales where the investors projected yields in the high teens. Usually those were more value-add properties as opposed to buying a stable lower-risk asset where the cash-on-cash yield might be in the upper single digits. It was well accepted in the industry that you can get a higher yield on a 4-plex than a 50-unit or 350-unit apartment complex. But - that higher potential yield came with higher risk. Same with investing in a single-tenant property leased to a national credit-worthy company (McDonalds, Walgreens, Chase Bank, etc.) vs. a similar property occupied by a mom-and-pop business. The former might offer a 5-6% yield - similar to a bond issued by that same company - the latter might offer a 10-15% yield.

[SeattleCPA]

However, comparing 21% of SFH to 17% stock market seems apples to oranges to me.

I think I agree with you.

My quote was shared because seems like we regularly get people arguing that houses don't produce positive returns on investment.

And then when someone does a study that shows positive returns (e.g., the rate of return of everything research paper), we get people saying their data is incomplete or the formulas are wrong.

Seemed interesting to share a big specialist real estate consultancy's calculations.