Unlocking Housing Investments: Strategies Beyond Homeownership

Investing in housing without buying a house is a great way to build wealth and achieve financial freedom. Here are some ways to get started:

- Real Estate Investment Trusts (REITs): REITs are companies that own and manage real estate, and they offer an easy way to invest in real estate without the hassle of being a landlord. By law, REITs must invest at least 75% of their assets in real estate and derive 75% of their income from property rent or mortgage interest. They also provide regular cash flow to investors in the form of dividends.

- Real Estate ETFs and Mutual Funds: These investment vehicles allow you to invest in a diversified portfolio of REITs and real estate stocks, offering broad diversification and low costs. Examples include Vanguard's VNQ and IYR.

- Invest in Home Construction: With limited housing inventory, investing in the construction side of the industry can be a smart move. Look for large homebuilders like Lennar (LEN) and D.R. Horton (DHI).

- Hire a Property Manager: If you want to own rental property but don't want to deal with tenants directly, hiring a property manager can be a great solution. While it comes at a cost, it can save you time and sanity.

- Real Estate Notes and Hard Money Loans: Investing in real estate notes through a bank or lending money directly to a real estate investor are other options to consider. Hard money loans tend to have higher interest rates and shorter terms but can provide good returns.

- Online Real Estate Platforms: Websites like Fundrise and Realty Mogul allow you to invest in commercial or residential real estate projects and receive cash flow distributions.

Invest in real estate ETFs

An exchange-traded fund, or ETF, is a collection of stocks or bonds in a single fund. ETFs are similar to index funds and mutual funds in that they offer broad diversification and low costs.

If you want to invest in real estate but also want to diversify, investing in a real-estate-themed ETF can be a smart move. Real estate ETFs provide investors with exposure to the commercial real estate sector, along with the benefits of diversification and professional portfolio management.

• Vanguard's VNQ, which invests in stocks issued by real estate investment trusts (REITs) that purchase office buildings, hotels, and other types of property.
• IYR, which offers targeted access to domestic real estate stocks and REITs.
• Real Estate Select Sector SPDR Fund (XLRE), a very popular REIT ETF with a low expense ratio of 0.09%.
• IShares Mortgage Real Estate Capped ETF (REM), a high-yielding mREIT that mirrors the FTSE Nareit All Mortgage Capped Index.
• Vanguard Real Estate ETF (VNQ), a $59 billion index ETF that holds nearly 160 publicly traded REITs.
• Invesco Active U.S. Real Estate Fund (PSR), a unique REIT ETF that is actively managed and relies on sophisticated statistical and quantitative measures to choose the REITs to invest in.

There are plenty of other real estate ETFs to choose from, so be sure to do your research and consider all the possibilities before investing.

Invest in real estate mutual funds

Investing in real estate mutual funds is a great way to gain exposure to the real estate market without dealing with the challenges of buying and managing physical properties. Here are some key points to consider:

Real estate mutual funds are professionally managed investment funds that primarily invest in Real Estate Investment Trusts (REITs) and real estate operating companies. These funds offer diversification, providing access to a wide range of real estate assets, including apartments, office buildings, shopping malls, hotels, and more.

Benefits of Real Estate Mutual Funds:

• Diversification: Real estate mutual funds allow investors to gain diversified exposure to the real estate market by investing in a variety of REITs, real estate stocks, and indexes. This diversification helps to mitigate risk and provides a safer investment option.
• Liquidity: Real estate mutual funds are more liquid than direct real estate purchases, making it easier to move assets if needed.
• Accessibility: These funds offer a relatively low investment minimum, making them accessible to investors with limited capital.
• Professional Management: Real estate mutual funds are managed by professional portfolio managers who conduct extensive research and analysis, saving investors time and effort in navigating the complex real estate market.
• Dividend Income and Capital Appreciation: Real estate mutual funds, like REITs, offer the potential for dividend income and capital appreciation, making them attractive to medium- to long-term investors.
• Hedge Against Inflation: As real estate values typically increase during inflationary periods, real estate mutual funds can help preserve capital in real terms.

Examples of Real Estate Mutual Funds:

• DFREX: Recommended by financial advisor Taylor Schulte for its low costs and strong track record, this fund is backed by decades of academic research from Nobel Prize-winning economists.
• TIREX: With $1.9 billion in assets, TIREX offers broad diversification, low fees, and investment in various real estate holdings.
• Fidelity® Series Real Estate Income Fund: This fund seeks higher-than-average income, with capital growth as a secondary objective.
• Baron Real Estate Income Fund: This fund combines a focus on capital appreciation and current income, investing at least 80% of its net assets in real estate income.
• Cohen & Steers Real Estate Securities Fund: This fund seeks total return by investing in real estate securities, including common stock, preferred stock, and debt securities issued by real estate companies. It has a solid performance track record and a five-star rating from Morningstar.

Remember, as with any investment, there are risks involved. Returns are not guaranteed, and real estate mutual funds may be subject to higher management fees and lower tax advantages than REITs. It is always prudent to seek financial advice and conduct thorough research before investing.

Invest in a real estate-focused company

Investing in a real estate-focused company is a great way to gain exposure to the housing market without dealing with tenants or the minutiae of landlord work. These companies can include hotels, resort operators, timeshare companies, and commercial real estate developers.

When investing in these companies, it's important to conduct thorough due diligence by researching their historical data, company history, and other details. Additionally, keep in mind that these companies may pay lower dividends than a REIT (Real Estate Investment Trust).

• RE/MAX Holdings Inc. (RMAX): A well-known real estate services company.
• CBRE Group (CBG): A commercial real estate operator.
• Equity One (EQY): A company focused on shopping centers.
• LGI Homes (LGIH): A large homebuilder with a strong track record.
• Lennar (LEN): Another established homebuilder in the market.
• D.R. Horton (DHI): A prominent name in the home construction industry.
• Pulte Homes (PHM): A reliable home construction company to watch.

Remember to do your research and consider seeking financial advice before making any investment decisions.

Invest in home construction

The homebuilding sector includes residential home construction companies, renovators, and repair firms. These companies may construct single-family and multi-family homes, condominiums, or mobile homes.

When considering investing in home construction, it is important to evaluate the performance of the industry and individual companies. Here are some key factors to consider:

• Industry trends: The construction industry is experiencing booming growth due to infrastructure spending and housing demand. The US government's commitment to infrastructure spending further strengthens this trend.
• Financial performance: Review the financial health and growth prospects of specific home construction companies. Look at their revenue, profit, and cash flow. Also, consider their market share and competitive position.
• Economic conditions: Keep in mind that the performance of homebuilders is often correlated with the overall economy. Strong job growth and a healthy economy typically drive higher demand for new homes.
• Company focus and strategy: Assess the company's focus on specific types of homes (high-end, low-end) and geographic regions. Ensure that their strategy aligns with the current real estate trends.
• Stock performance and dividends: If you're investing in individual stocks, consider the stock's performance, dividend yield, and potential for capital appreciation.
• Lennar Corp. (LEN)
• D.R. Horton Inc. (DHI)
• PulteGroup, Inc. (PHM)
• LGI Homes (LGIH)
• KB Home
• M/I Homes, Inc.
• Comstock Holding Co. Inc. (CHCI)
• Hovnanian Enterprises, Inc. (HOV)
• Meritage Homes Corp. (MTH)
• Cavco Industries Inc. (CVCO)
• Toll Brothers Inc. (TOL)

Additionally, you can consider investing in home construction through exchange-traded funds (ETFs) and mutual funds that focus on the homebuilding industry. These investment vehicles provide exposure to a basket of companies in the industry, reducing the risk associated with investing in individual stocks. Examples of homebuilder ETFs include:

• IShares U.S. Home Construction ETF (ITB)
• Invesco Dynamic Building & Construction ETF (PKB)
• SPDR S&P Homebuilders ETF (XHB)

In summary, investing in home construction can be a smart move, especially with the anticipated continued growth in the industry. By carefully evaluating individual companies and industry trends, you can make informed investment decisions and potentially benefit from the growth in the home construction sector.

Invest in real estate notes

Real estate notes are a type of investment where you buy debt at a discounted price. When you invest in real estate notes, you become the lender. You don't own the property, but you have the right to take possession of it if the borrower defaults on their loan.

There are two main types of real estate notes:

• Performing notes: These are notes where the borrower is making their scheduled payments. The focus for investors is on current income.
• Non-performing notes: These are notes where the borrower is not making their scheduled payments. The goal for investors is to modify the loan with the borrower, reach a settlement, or foreclose on the property.

• No property management: You receive the income while someone else manages the property.
• No maintenance issues: The homeowner is responsible for all maintenance and repairs.
• No tenant management: The homeowner must continue paying the mortgage, or you can take back the property through foreclosure.
• Lien secured by real estate: Real estate notes are secured by the property, meaning you can foreclose and take back the property if the borrower defaults.
• Predictable income: Real estate notes offer a fixed rate of return and a set amortization schedule, making them ideal for investors seeking consistent cash flow.
• Higher returns: Real estate notes typically offer higher interest rates than traditional investments like treasury bonds or CDs.
• Security: Real estate notes are secured by the underlying property, providing collateral for the investment.
• Diversification: Real estate notes offer a different risk-reward profile than stocks, bonds, or traditional real estate investments, helping to reduce overall portfolio risk.
• Control: Investors can negotiate the terms of the loan, including interest rates and repayment periods, allowing for more control over their portfolio.
• Discounts: Real estate notes can often be purchased at a discount, leading to higher yields and greater profits.
• Liquid secondary market: There is an active secondary market for real estate notes, providing investors with the option to sell their notes without incurring high costs.

How to Invest in Real Estate Notes

There are several ways to invest in real estate notes:

• Purchasing existing notes: Both performing and non-performing notes are available for sale on the secondary mortgage market. Sources for finding notes include online exchanges, calling banks, developing relationships with hedge funds and brokers, and building a network of individual sellers.
• Investing in a fund: Investors can partner with fund managers to take a more passive approach, diversifying their risk and leveraging the expertise of the fund's team.
• Buying partial notes: It is possible to buy a portion of a real estate note from an existing note holder. This allows investors to receive a lower rate of return while the note holder recapitalizes and invests in other opportunities.

Risks of Investing in Real Estate Notes

While real estate notes offer many benefits, there are also risks to consider:

• Borrower default: If the borrower stops making payments, the investor may need to initiate foreclosure proceedings and deal with the associated legal and financial burdens.
• Fraudulent notes: Proper due diligence is crucial to avoid buying a worthless note or a note with no security.
• Insufficient collateral: In the event of foreclosure, the underlying property may not be worth enough to recover the investor's investment.
• Interest rate risk: If market interest rates rise, the value of the real estate note may decrease, making it harder to sell.
• Real estate market risk: A downturn in the real estate market can increase the likelihood of borrower default and reduce the value of the underlying property.
• Legal and regulatory risk: Investing in real estate notes is lightly regulated, and improper debt collection or foreclosure procedures can lead to legal issues.
• Limited liquidity: Real estate notes are less liquid than traditional capital market investments, and finding buyers may be challenging.
• Counterparty risk: When buying partial notes, there is a risk that the note holder may not be creditworthy and may be unable to make you whole if the borrower defaults.
• Concentration risk: Investing in real estate notes does not eliminate exposure to real estate market fluctuations.
• Lack of insurance: Unlike bank accounts, real estate notes do not have FDIC or SIPC insurance to protect your investment.

Frequently asked questions