Abstract
We investigate the returns to individuals who invested in residential real estate over 1999–2015. Using purchase and sales prices, we measure returns on properties that were both bought and sold by an investor using annualized price appreciation. We find that investors outperform market indices. Real estate investors earn larger returns if they live near the investment property, buy without a mortgage, and have experience in real estate investing. These characteristics are associated with investors paying less, as a percentage of the assessed value, for the property. Investors earn smaller returns on houses that they live in than on other property. Since appreciation reflects expenditures on improvements, we study land and mobile home investments where returns are less likely to be affected by improvements and document similar results. Overall, we highlight the risk and returns of residential real estate investments by retail investors. In addition, this paper sheds light on the role of investors in the residential market.
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Notes
See Real Estate Investment Realities (2012) for further details.
See Gao and Li (2012).
See Fortune (2017) for further details.
The annualized price appreciation for each property proxies for the return.
Zillow generates their data from county records. They appear to have started by compiling data for large counties with active real estate markets. Over time, they have expanded the number of counties. Rather than all 50 states we consider a subset of 14 states. If we included data for all states, we would have very little or no data in the early years for states like North Dakota, Vermont, Kansas, etc. Secondly, many states have non-disclosure laws where the sale price is not revealed and hence a comprehensive transaction dataset is not available for such states. Lastly, the descriptions of properties are idiosyncratic, contain misspellings, and abbreviations. These descriptions also differ significantly from state to state. For example, “double bungalow” is a term we encounter in descriptions of Minnesota property but not elsewhere. We use descriptions of the properties from deed records of the states in our sample to determine whether they are houses, recreational properties, condos, apartments, mobile homes or land.
In addition, we have information on investor transactions in land and mobile homes. While our focus in the paper is on houses, condominiums, and apartments, we do examine returns on these other properties.
See Swanson (2016) for further details.
Results are very similar when we use $1000 as a minimum purchase and sales price.
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Acknowledgement
We thank an anonymous referee for insightful comments. Data provided by Zillow through the Zillow Transaction and Assessment Dataset (ZTRAX). More information on accessing the data can be found at http://www.zillow.com/ztrax. The results and opinions are those of the authors and do not reflect the position of Zillow Group.
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D’Lima, W., Schultz, P. Residential Real Estate Investments and Investor Characteristics. J Real Estate Finan Econ 63, 354–393 (2021). https://doi.org/10.1007/s11146-020-09771-8
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DOI: https://doi.org/10.1007/s11146-020-09771-8