In of my previous posts I wanted to know reference the expected annualized return of real estate. If I had to make a guess, I’d say real estate will return 5% based on conversations I’ve had with real estate agents, but I didn’t have any proof or statistical data to back it up.
I did some research and found a great scholarly article Contrasting Real Estate with Comparable Investments 1978 to 2008 by Jack Clark Francis and Roger G. Ibbotson. Francis is a professor of economics and finance at Bernard Baruch College (NY) and Ibbotson is a professor at the Yale School of Management. By permission, I have made it available on The Intelligent Investor.
Over the course of 31 years, residential real estate has returned 5.68% compounded annually which includes price appreciation and the rent (or income) generated from the real estate.
This is an important number to know because unless you purchase at a steep discount (or premium) you will likely return 5.68% over an extended period of time.
While this is a far cry from the 10.84% annual return by the SP 500 during the same period, according to Francis and Ibbotson , the market correlation is relatively low at 0.25 (a correlation of one is considered perfect, more on correlations). This means real estate investments can serve as a good source of diversification from your stock investments (i.e., 401k or IRA).
I have thoroughly enjoyed reading Francis and Ibbotson  and will likely continue to site more data from this source. A moderate read (15 pages total), I encourage you to give it a shot. Enjoy.