Buying real estate has become more than just finding a place to live. Investing in real estate has become increasingly popular over the last 50 years and has become a common investment vehicle. The average homeowner in the US typically has a significant portion of their net worth tied up in real estate. In most cases, it’s just their primary home and in other cases, it is primary home and several rental properties. But, buying and owning real estate beyond a primary home is a lot more complicated than investing in stocks and bonds. So why, do people end up buying more real estate as investment properties instead of taking disposable income and investing it in the stock market.
It’s the allure of appreciation and income from real estate holdings. The most common strategy is to charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Then, there is appreciation – according to the U.S. Census Bureau, real estate has consistently increased in value from 1940 to 2006, then after a brief dip from 2008 to 2010 has been increasing ever since. But, there are risks – bad or no tenant, damages to property, maintenance expenses, drop in value, lack of liquidity, property taxes etc. Despite that, most property owners swear by this strategy when the times are good – property values are increasing, rental income is growing and generating positive cash flow.
Future Wealth’s View
While we commend those homeowners who are able to spend the time and effort and in the process reap the rewards of owning investment properties, we believe an easier path to replicating the same investments is through REITs (Real Estate Investment Trusts). With reliable ~3% yield, 20-40% annual appreciation over the past 5 years and none of the hassles of home ownership, we view REIT ETFs as more compelling alternative.