If you can’t buy a home, should you still invest in real estate?


Potential first-time buyers across the country are disappointed as they realize that rapidly rising home prices have left them out of the market. Many homebuyers are losing auction wars to cash buyers. Only around 549,000 homes were available for sale nationwide in June 2021, a number down 45% in the past four years.

Some Americans who have saved tens of thousands of dollars for a down payment that they now realize is not enough to buy a house are wondering: should I find another way to invest in real estate? other than buying a house?

Some commentators are celebrating this idea, suggesting that it would be less risky for most Americans to be tenants rather than owners, and those tenants might instead invest money in REITs (real estate investment trusts).

About 2 in 3 homes in the United States are owner-occupied, but home ownership can be risky. The average family has 42% of their wealth tied up in their home, which means they aren’t very diverse: if the home has physical issues, or the neighborhood home’s value drops, this homeowner has put many of his eggs in one basket.

But all over the United States, the cost of rent is often high relative to the price of homes. According to the US Census Bureau, the median asking rent for vacant rental units in the first quarter of 2021 was $ 1,226, compared to a median asking price for vacant available-for-sale homes of $ 200,900.

Let’s look at what would happen financially if you bought a modest home, versus 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, investing the money. who would like were your deposit in Invitation Homes REIT (INVH). To keep things simple, we’ll be looking at the past four years, from April 2017 to March 2021, the end date of the last Quarterly Results Report for Invitation Homes.

Rent while investing vs owning a house

Invitation Homes, a publicly traded REIT from the world’s largest private equity firm, Blackstone

BX
, owns approximately 80,000 homes nationwide, including more than 12,000 in the Metro Atlanta area. According to their latest quarterly earnings report, their homes are worth $ 16.3 billion and they get $ 1.9 billion in rent a year, which means when they rent a house worth around 200,000 dollars, they charge about $ 1,900 in rent each month.

But the mortgage payment for a home worth $ 200,000 is only about $ 960, assuming a 4% interest rate, a 20% down payment, and $ 132 in monthly property taxes. . Someone who rents an Invitation Homes property will spend about twice as much a month on rent than their monthly mortgage payment if they owned the home.

The tenant, however, would have the option of investing the amount of their down payment.

If instead of paying a down payment of $ 40,000, the tenant had invested $ 40,000 in INVH on April 2, 2017, their investment would have reached $ 63,385 by March 31, 2021, a healthy growth of 12% per year.

The owner would have directly benefited from the rise in house prices during the period he went to sell his house. A home purchased for $ 200,000 in April 2017 would be worth approximately $ 261,000 in March 2021. Due to the power of leverage, the $ 40,000 down payment has grown to over $ 100,000 in equity. And remember, the landlord had monthly housing payments that were about half the renter price.

When you add it all up, including the owner’s closing costs and maintenance costs (but assuming the owner doesn’t deduct the mortgage interest from his taxes), the owner gets a cash advance of over $ 60,000 on a period of only four years. The longer the owner stays there, the better.

Take-out?

Landlords can charge hefty markups on rent, some of which are absorbed by expenses such as marketing, vacant homes among tenants, and the high cost of tenant eviction, a practice that business owners shy away from. frequently deliver. If you rent out your home and invest in a property management company instead, a lot of your money will languish with middlemen.

Anyone who wants to celebrate the fact that America is becoming a nation of tenants has to consider the very real loss of wealth this will create 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 allows investors to have a “pure play” on single-family residential real estate in the United States.

Some REITs focus exclusively on residential real estate, such as Invitation Homes

INVH
, but about 80% of the REIT market is commercial or industrial buildings, buildings including offices and shopping centers.

Although 2020 was a good year for house prices, the REIT industry as a whole fell 2% in 2020, while the S&P 500 was up 16% during the same period.

“If you invest in REITs, you hardly ever invest in appreciating home prices. You really invest in the commercial space, and more specifically, you invest in the financing of the commercial space, ”said Dan Egan, vice president of behavioral finance. As a result, he explained, “REITs are very sensitive to fluctuations in interest rates because they typically have a lot of built-in funding. For this reason, he said he would not recommend that someone save money to buy a house in order to invest in specific REITs, especially not under the false assumption that if house prices go up, their REIT is likely to increase as well.

And REITs are already part of the S&P 500, which means 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 have extra cash to invest, a broadly diversified portfolio, rather than a heavy concentration of REITs, is the best way to go. probably the way to go.

This article is for informational purposes only and does not constitute tax, investment or financial advice.

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