If You Can’t Buy A Home, Should You Still Invest In Real Estate?
Anyone who invests in the S&P 500 is already invested in real estate. 30 REITs are members of the S&P … [+]
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Across the country, potential first-time home buyers face disappointment as they realize that the rapid rise in home prices has excluded them from the market. Many homebuyers lose the bidding war against cash buyers. There were only about 549,000 homes for sale nationwide in June 2021, a number that has fallen 45% over the past four years.
Some Americans, who have saved tens of thousands of dollars on a down payment that they now know won’t be enough to buy a home, wonder: Should I find any other way to invest in real estate other than buying a home? ?
Some commentators celebrate this idea, suggesting that it would be less risky for most Americans to be tenants rather than homeowners, and those tenants could invest money in REITs (real estate investment trusts) instead.
About 2 out of 3 homes in the United States are owner-occupied, but home ownership can be risky. The average family has 42% of their assets tied up in their home, which means they’re not very diversified: if the home has physical problems or the property’s value drops, that homeowner has stuck many eggs in one basket.
But in the United States the cost of renting a house is often high relative to the price of a house. According to the US Census Bureau, the average asking rent for vacant rental units in the first quarter of 2021 was $ 1,226, compared to the average selling price for vacant units for sale of $ 200,900.
Let’s look at what would happen financially if you bought a humble home, or if you rented the same type of home from a business owner like Invitation Homes, the largest single family home owner in the United States, and invest the money that You would have had your deposit in the Invitation Homes REIT (INVH). For the sake of simplicity, let’s look at the last four years, from April 2017 to March 2021, the end date of Invitation Homes’ last quarterly income statement.
Rent while investing vs. owning a home
Invitation Homes, a publicly traded REIT spun off from the world’s largest private equity firm Blackstone BX, owns approximately 80,000 homes across the country, including more than 12,000 in the greater Atlanta area. According to their latest quarterly earnings release, their homes are valued at $ 16.3 billion and they rake in $ 1.9 billion annually, which means they charge about $ 1,900 in rent every month when they get one Approximately $ 200,000 home to rent.
But the mortgage payment on a $ 200,000 home is only about $ 960 assuming a 4% interest rate, 20% down payment, and $ 132 monthly property tax. Someone renting a property from Invitation Homes will be spending about twice as much rent each month as their monthly mortgage payment would be if they owned the home.
However, the tenant would have the option to invest his down payment amount.
If the tenant had invested $ 40,000 in INVH on April 2, 2017, instead of a $ 40,000 down payment, their investment would have grown to $ 63,385 by March 31, 2021, a healthy 12% annual growth.
The homeowner would have benefited directly from the rising house prices during the period when he sold his house. A home bought for $ 200,000 in April 2017 would be worth around $ 261,000 by March 2021. Because of the leverage, the down payment grew from $ 40,000 to more than $ 100,000 in equity. And remember, the homeowner had monthly home payments that were roughly half the renter’s price.
If you add it all up, including the homeowner’s closing costs and maintenance costs (but assuming the homeowner doesn’t deduct mortgage interest from their taxes), the homeowner is more than $ 60,000 ahead over just four years. The longer the homeowner stays, the better off she will be.
Take that away?
Landlords can charge high rent surcharges, some of which are eaten up by expenses such as marketing, vacant houses between tenants, and the high cost of evicting tenants, a practice that corporate landlords often use. If you rent your apartment and instead invest in property management, a large part of your money will be languishing with middlemen.
Celebrating the fact that America is becoming a nation of tenants must reckon with the very real loss of wealth that it will cause for the middle class.
If you can’t buy a home, don’t double up on REITs
In some ways, Invitation Homes is unique in that it gives investors the opportunity to “play pure game” with single-family homes in the United States.
Some REITs focus solely on residential real estate, like Invitation Homes INVH, but around 80% of the REIT market is commercial or industrial real estate, buildings including offices, and shopping malls.
Although 2020 was a boom year for property prices, the REIT sector fell 2% overall in 2020, while the S&P 500 rose 16% over the same period.
“When you invest in REITs, you almost never invest in raising home prices. They’re really investing in commercial real estate, and especially commercial real estate finance, ”said Dan Egan, vice president of behavioral finance and investments at Betterment. As a result, he stated, “REITs are very sensitive to changes in interest rates because they usually contain a lot of embedded funding.” Because of this, he said he would not recommend anyone saving money to buy a home specifically to invest in REITs, especially under the false assumption that as property prices go up, so will their REIT.
And REITs are already part of the S&P 500, which means that if you own S&P 500 index funds, you already have some exposure to that asset class.
While everyone’s situation is different, if you’ve decided to keep renting instead of buying a home and investing a little more money, having a broadly diversified portfolio rather than a high concentration of REITs is probably the way to go.
This article is for informational purposes only and is not intended as tax, investment, or financial advice.