Average ROI of Real Estate

Highlights. Economists expect the average real estate return on investment (ROI) to improve, with values rising by as much as 10% in the next year.

  • The average Year-over-Year (YOY) ROI is 11.1%.
  • The year-to-date (YTD) real estate price return as of April 2021 is 6.9%.
  • As of the first fiscal quarter of 2021, the average 5-year ROI is 36.2%.
  • $8,190 is the average total net return for an apartment unit.
  • Low-rise apartment buildings are among the most lucrative with a 9.0% ROI.
  • The total market return in 2020 was -5.29%.
Largest Average One-Year Returns on Real Estate Property Investments
Property Type 1-Year ROI 1-Year Net*
Average Industrial 9.5% $8.16/ft2
Low-Rise Apartments 9.0% $11.88/ft2
Multi-Family Home 7.6% $7.69/ft2
Average Residential 7.5% $11.64/ft2
New Single Family Home 1.32% $2.03/ft2

*Annual net refers only to equity; operating expenses and income are excluded. (Were they included, this would be referred to as the “total annual net”.)

Real Estate Investment Properties

COVID-19 has significantly affected certain commercial and residential property investments, especially hotels and urban rentals.

  • Mid- and high-rise apartments of the type only found in cities currently offer the lowest 1-year ROI at -9.0%, averaging a loss of $27,070.69 per unit.
  • Large hotels currently offer the second lowest 1-year ROI of any real estate investment at -$21,335 per room, averaging a 7.2% loss.
  • Real estate is generally categorized as either residential or commercial property.
  • Residential real estate includes single family homes, multi-family homes, apartment buildings, and condominiums.
  • Commercial real estate includes office buildings, retail spaces, hotels, warehouses, and anywhere else business is the primary purpose.
  • Large apartment complexes that include office space may be considered flex or commercial real estate.

Bar Graph of ROIs over various investment periods from 1 year to 30 years starting in 1990

Residential Real Estate

Beginning investors usually look into small residential properties. Residential real estate is a more conservative investment than commercial real estate, offering consistently fair returns.

  • A new single family home has a total net 1-year ROI of $5,082.23.
  • The average single family home as a 1-year ROI of $184.22.
  • The average home owners hold on to their property for 8.17 years.
  • Specialists expect multi-family home investment values to increase as much as 33% in 2021.
  • Smaller apartment buildings and multi-family homes offer a significantly better return than large complexes.
  • Suburban homes offer significantly better returns than urban homes.
  • Vacation rentals and Airbnbs may be considered residential real estate for tax and zoning purposes.
Average One-Year Returns on Residential Property Investments
Property Type 1-Year ROI 1-Year Net*
Garden/Low-Rise Apartments 9.0% $11.88/ft2
Average Residential Property 7.5% $11.64/ft2
Multi-Family Home 7.6% $7.69/ft2
New Single Family Home 1.32% $2.03/ft2
Average Single Family Home 0.07% $0.09/ft2
Average Apartment Building -0.9% -$1.61/ft2
Mid- or High-Rise Apartments -9.0% -$24.41/ft2

Short-Term Rental

Vacation homes and Airbnbs rent for higher prices than long-term apartments. Some of that is due to additional wear and tear, which drives up operating costs.

  • The average Airbnb returns $2,752.80 per month in rent.
  • The average Airbnb rents for $185 per night.
  • Occupancy averages 48%.
  • At 100% occupancy, the average Airbnb returns $5,735 per month in rent.
  • 83% of travelers prefer vacation rentals near a large body of water.
  • Among them, 89% specifically want a beach nearby.
  • Following a financial dip in 2020, investors show confidence vacation rentals will become more lucrative in the coming year.
    • Investors spent $2 billion dollars on Airbnb throughout the year after COVID-19 was declared a pandemic.
    • Travelers are 18% more likely to consider vacation rentals a less significant health risk than hotels.
    • Airbnb reports a 20% increase in stays of 28 days or longer.
    • 95% of vacation rental operators plan to implement safety-inspired technology, such as remote and touchless check-in processes.
    • Processing remote check-ins is an average of 80% faster than manual registration.

Bar Graph: Average Real Estate Investment Property 1-Year Returns, $ per square foot and ROI%

Apartment Rental

Long-term apartment rentals don’t offer as much potential cash flow as short-term rentals. They may be more cost effective in the long run, however, due to fewer unknown variables, such as vacancy rates.

  • The total net 1-year ROI for the average apartment (including lost market value) is $8,190.22.
  • The 1-year ROI on the average garden/low-rise apartment is $13,370.
  • After operating expenses, the average apartment nets $9,976.70 annually in rent.
  • Annual operating expenses for an apartment property average $7.70 per square foot.
  • Garden and low-rise apartments cost $6.61 per square foot per year while mid- to high-rise apartments cost $9.60 per square foot to operate.
  • The average 2-bedroom apartment rents for $1,543 per month or $18,516 per year.
  • The average apartment size is 1,109 ft2.
  • At the end of 2020, market absorption held steady at 60% (its highest point in 5 years), indicating a seller’s market.
  • Rent prices fell 5.91% from 2019 to 2020.
  • Large apartment complexes may fall under commercial zoning.

Single Family Rental

Small properties usually cost much less per square foot than larger complexes. Single family home rentals also tend to have less turnover than apartments, meaning less vacancy as well as wear and tear.

  • An average single family rental has a total net ROI of $10,637.
  • The national average rent for a single family home is $1,742 per month or $20,904 per year.
  • After operating and capital expenses, rent alone nets $10,452.
  • For a new single family rental, this is a total ROI of $15,534.
  • Nationwide, single family rental assets total $2.3 trillion.
  • Home rental vacancies are lowest in Massachusetts, New Hampshire, and Rhode Island.
  • Alabama, Kansas, and Oklahoma have the highest rates of rental home vacancy.
  • The West region of the United States has the lowest rate of homeownership at 59.3%.
  • California has the most lucrative single family rental market.
  • West Virginia’s single family rental market is the least lucrative nationwide.
Single Family Homes Average Returns by State
State 1-Year ROI State 1-Year ROI
Alabama $174.84 Montana $277.39
Alaska $209.82 Nebraska $171.59
Arizona $272.14 Nevada $244.86
Arkansas $139.87 New Hampshire $265.15
California $508.58 New Jersey $305.47
Colorado $360.11 New Mexico $195.83
Connecticut $269.35 New York $398.41
Delaware $244.16 North Carolina $237.66
District of Columbia $424.64 North Dakota $165.29
Florida $241.33 Ohio $132.24
Georgia $224.14 Oklahoma $153.89
Hawaii $449.47 Oregon $331.22
Idaho $300.75 Pennsylvania $181.52
Illinois $164.73 Rhode Island $270.75
Indiana $141.25 South Carolina $195.86
Iowa $150.36 South Dakota $168.20
Kansas $132.92 Tennessee $220.38
Kentucky $154.94 Texas $209.82
Louisiana $174.91 Utah $384.73
Maine $206.39 Vermont $227.38
Maryland $239.27 Virginia $242.24
Massachusetts $426.35 Washington $349.76
Michigan $163.72 West Virginia $115.45
Minnesota $206.36 Wisconsin $174.88
Mississippi $154.91 Wyoming $185.41
Missouri $150.43 Nationwide Average $184.22

House Flipping Returns

The house flipping isn’t as lucrative now as it was several years ago, but certain markets are still very active. High returns depend on careful planning and focus on the best home improvements for resale.

  • 38.7% is the national average ROI for a flipped house.
  • Nationwide, flipping a house averages a $121,325 ROI.
  • Market volatility makes predicting ROI on a particular building difficult if not impossible.
  • Statistical trends indicate that rental rates are increasing as homeownership falls out of favor in certain regions.
Top House Flipping Markets’ Average Returns
Metro 2019 ROI Net Profit*
Pittsburgh, PA 131.2% $159,920
Flint, Michigan 127.6% $117,730
Shreveport, Louisiana 112.5% $219,490
Scranton, Pennsylvania 112.0% $126,790
Knoxville, Tennessee 105.0% $250,640
Cleveland, Ohio 100.0% $187,900
Philadelphia, Pennsylvania 100.0% $286,800
Buffalo, New York 89.7% $171,150
Memphis, Tennessee 79.2% $184,460

Commercial Real Estate

Some investors consider commercial real estate to be the more cost effective investment due to the greater potential for large returns. Commercial property values, however, are relatively inconsistent.

  • The 1-year ROI on an average 20,000 square foot commercial property is -$32,000.
  • Commercial real estate acquisitions fell by as much as 57% in 2020.
  • Industrial real estate is the only commercial property type experiencing 12-month gains.
  • Apartment rentals may fall under commercial real estate or flex space if the building also includes commercial rentals (i.e. offices, retail shops, etc.)
  • Apartments designated commercial real estate is suffering heavy financial losses compared to smaller buildings and residential complexes.
  • Economics experts expect commercial real estate values to climb in 2021.
Average One-Year Returns on Commercial Property Investments
Property Type 1-Year ROI 1-Year Net
Industrial Property 9.5% $8.16/ft2
Office Space -0.2% -$0.33/ft2
Retail Space -6.7% -$14.79/ft2
Small Motel -7.2% -$16.79/ft2
Large Hotel -7.2% -$36.94/ft2
Average Commercial Property -8.0% -$1.60/ft2
Upscale Retail/Boutique -9.0% -$19.89

Real Estate Market Investment

Real estate indices suggest that real estate investments suffered through 2020, with consequences unevenly distributed throughout the industry.

  • The Dow Jones U.S. Real Estate Index indicates the average 1-year return on real estate is -11.13%.
  • A 3-year return is 2.34%, and a 5-year return is 3.16%.
  • The Standard & Poor’s (S&P) 500 Real Estate Index reports the average 1-year return at -7.71%.
  • A 3-year return is 4.92%, and a 5-year returns is 4.20%.
  • S&P’s U.S. Real Estate Investment Trust (REIT) has a 1-year ROI of -12.32%.
  • REITs for data centers have the highest returns at 17.2%.

Bar Graph: 30-Year Returns for $1,000 Real Estate Investments, equity REITs offer highest return by $12,134

Real Estate Trusts & Funds

REITs may be attractive to new investors who want to learn how to start investing in real estate, especially those who already have experience with stock market investments.

  • REITs are required to return 90% of taxable income to shareholders in order to receive special tax considerations.
  • Established through the Cigar Excise Tax Extension of 1960, REITs became commonplace in the 1980s and ’90s.
  • One study found that REITs delivered the highest 30-year return on investment compared to other types of real estate investments.
  • Equity REITs outearned apartment building investments by 102.2%, and they outearned hotel investments 231.7%.
Average Return on Top ETFs
Fund Symbol, Full Name YTD 1-Year ROI 5-Year ROI
XLRE, Real Estate Select Sector SPDR Fund -4.92% 45.59%
FREL, Fidelity MSCI Real Estate Index ETF -7.14% 43.94%
EWRE, Invesco S&P 500® Equal Weight Real Estate ETF -4.11% 32.58%
VNQ, Vanguard Real Estate Index Fund -7.14% 35.50%
IYR, iShares U.S. Real Estate ETF -8.38% 41.29%%
PSR, Invesco Active U.S. Real Estate Fund -8.57% 40.53%

Historical Real Estate Investment Returns

While real estate has historically been considered the best investment, the market can also be volatile.

  • 1-year real estate investment returns hit their highest point in 1946, with that year’s S&P hitting 24.10%.
  • In 2008, the average 1-year return fell to -12.00%, its lowest point prior to 2020.
  • Prior to the 2020 crash, the average annual return in the 21st Century was 4.12%.
  • Also prior to the 2020 crash, the average 10-year ROI was 39.54%; the average 20-year ROI was 82.49%.

Line Graph: 90 Years of Real Estate Investment Annual Return Rates (1928 to 2019)

Sources

  1. S&P Dow Jones Indices, Dow Jones U.S. Real Estate Index
  2. National Bureau of Economic Research, Total Returns to Single Family Rentals
  3. University of New Hampshire, U.S. Real Estate Investment Performance: 1983-2012
  4. National Association of Realtors® (NAR), Research and Statistics: Housing Statistics
  5. NAR, Commercial Market Insights December 2020
  6. National Association for Industrial and Office Parks, Office Space Demand Forecast, Fourth Quarter 2020
  7. Attom Data Solutions, U.S. Home Flipping Rate Reaches a Nine-Year High in Q1 2019
  8. Zillow, United States Housing Data
  9. Fixr, How Much Does It Cost to Build the Average Hotel?
  10. PEW Research Center, Prompted by Pandemic, Some States Buy Hotels for the Homeless
  11. National Apartment Association, 2019 NAA Survey of Operating Income & Expenses in Rental Apartment Communities
  12. Urban Land Institute, Emerging Trends in Real Estate®: United States & Canada 2021
  13. American Association of Retired Persons, Vacation Home Rentals Billed as Safer Alternatives to Hotels
  14. Phocus Wire, Touchless Tech: How Short-Term Rentals Are Simplifying Stays Amid COVID-19
  15. National Association of Home Builders (NAHB), Apartment Absorption Steady but Rent Prices Fall
  16. Realtor.com, Real Estate Data Library
  17. Quartz, Hotels Are Shrinking Rooms and Adding More Places to be Alone with Other People
  18. NAHB, New Single Family Home Size Continues to Fall
  19. Public Library of Science, 120 Years of U.S. Residential Housing Stock and Floor Space
  20. HospitalityNet, The Growth of Microhotels in North America
  21. The Journal of Real Estate Finance and Economics, Why Are Small and Medium Multifamily Properties So Inexpensive?
  22. ETF Database, Real Estate ETFs