Real estate can be a great way to build wealth over the long term, but the truth is that owning investment properties, investing in commercial real estate development, or fixing and flipping houses isn't for everyone. But don't worry. As legendary investor Warren Buffett has said, "[I]t is not necessary to do extraordinary things to get extraordinary results."
This is as true in real estate as it is anywhere else. The Vanguard Real Estate ETF (VNQ 0.01%) is an index fund that takes the company-specific risk out of real estate investing and is considered a boring investment by many. But you might be surprised at the long-term potential.
Not the most "exciting" investment
Real estate stocks are already considered to be rather boring by many people. Most real estate investment trusts, or REITs, are designed to produce consistent, predictable income over time, and their businesses are often not very exciting. After all, the core business of most real estate stocks is simply acquiring or building commercial properties and then renting the space to long-term tenants. Not exactly as thrilling as say, software-as-a-service (SaaS) businesses or the latest in consumer electronics.
Index funds are also considered to be rather boring by many stock investors, as they are essentially designed to take the guesswork out of long-term investing.
The Vanguard Real Estate ETF essentially combines two investment concepts many people think of as boring. It's an index fund that invests in a basket of REITs. But despite the fact that this isn't the most glamorous investment, it can be rather exciting.
Check out the long-term performance
Real estate investment trusts are designed to produce excellent total returns over time, thanks to a combination of dividends, the appreciation of their underlying properties, and other value-creation strategies such as development, capital recycling, and more.
In fact, you might be surprised to learn that during the period from 1972 (when the FTSE NAREIT All Equity REITs index was formed) through 2019, REITs actually outperformed the S&P 500.
During that 47-year stretch, the S&P 500 delivered 12.1% annualized total returns for investors, a pretty impressive record of performance. On the other hand, the benchmark REIT index produced 13.3% annualized returns. This may not sound like a huge difference, but consider that a $10,000 investment in the S&P 500 in 1972 would have grown to about $2.15 million by the end of 2019. A $10,000 investment in the REIT index would have produced an ending value of $3.54 million. So, while the investment itself may not be the most exciting, the returns REITs have produced for long-term investors are certainly not boring.
The bottom line on REIT index fund investing
Investing in the Vanguard Real Estate ETF (or a similar real estate index fund) isn't terribly exciting but can be a great way to build wealth if you measure your investment returns in decades. And not only that, but because REITs generally pay above-average dividends, it can also be a great income investment after you retire as well.
To be sure, the excellent past performance of REITs as a whole doesn't guarantee the same results over the next 47 years. But the track record and slow-and-steady value creation approach of REITs shows that you don't need to do exciting things with your money to achieve great long-term performance.
