When people ask, “What are the typical returns on real estate investments?”, the short answer is that it depends.
The long answer is that returns can range anywhere from 4-20%, or even more in some cases. The key is understanding why that range falls where it does and what factors influence where your investment falls within it.
Let’s look at the four main variables that shape typical returns in real estate.
1. Risk and Return Go Hand in Hand
Every investment involves some level of risk, and real estate is no different. Across the real estate spectrum, the type of property you buy, the location, and the management structure all affect your risk profile.
The general rule holds true: the higher the risk, the higher the potential return – but that also means a higher chance for things to go wrong.
For example:
- A triple-net ground lease commercial property with a strong corporate tenant and minimal landlord responsibility might deliver a return around 4%. It’s predictable, steady, and low risk.
- A value-add apartment project in a C-class neighborhood might return 20% or more, but comes with far more opportunities for things to go wrong.
Understanding where your property falls on that risk spectrum is the first step in setting realistic return expectations.
2. Defining Return
When investors talk about “returns on real estate investments”, they often refer to the cap rate, a metric that measures the income a property produces compared ot its price.
In Central Pennsylvania and our surrounding areas, typical cap rates range from 6-8% for most stabilized assets like multifamily, standard retail, and office properties.
But the cap rate only tells part of the story. It represents the property’s income in its current state, not the total potential return. Other key components include:
- Market appreciation, when property values increase over time.
- Forced appreciation, when you improve the property – perhaps by upgrading tenants or renovating units – to raise income and reduce risk.
So while a cap rate helps you compare deals on even ground, it’s not the full picture of how much you can earn.
3. The Importance of Time
Timing plays a big role in determining returns on real estate investments. Real estate is a slower-moving investment, and you rarely get in and get out quickly. Most investors hold properties for at least five years or more.
Let’s say you expect a 20% total return over a 5-year period. Maybe you earn 10% in cash flow, and the other 10% comes from appreciation at the end of that period. Because you don’t receive that appreciation until you sell, it’s not worth quite as much as if you received the full 20% each year.
That concept is called the time value of money – the idea that a dollar today is worth more than a dollar in the future.
If you’re comparing real estate to other investments, like stocks, it’s important to consider this timing. Real estate often builds wealth more gradually, combining ongoing income with long-term value growth.
4. Before- and After-Tax Returns
Taxes are a major reason people invest in real estate. The depreciation deduction is especially powerful because it allows investors to reduce taxable income without actually spending money.
If you compare real estate to something like the stock market, those tax advantages can make a big difference. You might have a property producing an 8% cash return, but once you factor in tax savings, your effective return could be several points higher.
That’s why many investors evaluate not only their pre-tax returns but also their after-tax internal rate of return (IRR) – a metric that includes income, appreciation, and tax effects over time.
Typical real estate investments usually fall within a 6-8% cap rate and a 12-15% IRR. These numbers vary based on risk, timing, and the investor’s specific strategy, but they provide a useful benchmark for what to expect.
Final Thoughts
So, what are the typical returns on real estate investments? The truth is, they vary widely depending on the property type, amount of risk, how long you hold it, and how the investment is structured.
Low-risk commercial properties may produce steady 4% returns, while higher-risk value-add projects can exceed 20%. However, most investments fall somewhere between the two. The key is understanding what drives those numbers – risk, timing, appreciation, and taxes – and aligning your strategy with your goals.
The investors we work with appreciate the clarity our team brings to understanding returns and evaluating which opportunities match their goals. If you’re looking for investment real estate in Pennsylvania or Maryland, contact us to discuss how to structure a portfolio that meets your needs.
