1. Invest in Real Estate by Buying a House
Don’t skip this one though because I explain why it might be the worst of the three options.
Buying a house is the most obvious but sometimes most difficult way to invest in real estate. I was lucky enough to buy my first house in 2013 and ride the wave of appreciating home prices until 2019. I then bought another house with my fiance in 2021 using the equity from the first house as our down payment.
But if you can’t afford the down payment or monthly mortgage right now, don’t worry, because…
Real estate is not that great of an investment.
Yeah, that’s right. You heard me.
Despite all those macroeconomic and demographic tailwinds. Despite the recent surge in home prices. Despite deducting mortgage interest on your taxes. Despite almost all conventional personal finance wisdom. It’s still not that great of an investment.
Don’t get me wrong. It’s fine. And most of the wealthiest people are wealthy thanks to real estate. But it’s not great.
For starters, shit goes wrong all the time and there’s no one to call. Well, actually, there are plenty of people to call in exchange for a hefty fee.
Even when shit isn’t going wrong, humans have a tendency to remodel, redecorate, redesign and redo almost every room in their house every 5 years. Those “investments” will not pay back their original value (even the kitchen and bathroom updates you made) so you’re pretty much just making them for you. We can call that one a wash.
Houses are a time-sink as well. Lawn-care, snow removal, landscaping, painting, repairing, cleaning, organizing, and outfitting. If understanding the cash value of time is the real secret to a happy life, a house will not give you more of it.
The fees for buying and selling are also astronomical.
Realtor fees, transfer taxes, appraisal fees, inspection fees, title insurance, administration fees, filing fees, recording fees, wire fees, and “Fee-fi-fo-fum” here comes the big bad bank to take your savings account and crush it into dust.
Don’t forget taxes, HOA dues, and insurance.
That said, assuming you don’t overpay for your house, you enjoy being a weekend handyman or handywoman, and you aren’t constantly buying expensive furniture or remodeling, it can help you keep pace with inflation, and earn a little equity at the same time. If house prices appreciate, you can also take advantage of debt leverage.
And house prices usually appreciate. Just look at this chart from Ben Carlson of downturns in the housing market. There’s only been 2 in the past 30 years:
I don’t regret buying a house in my early 20s, but in order to afford it by myself, I had to live further away from the office, spend a lot time working on it, and forego some other spending opportunities like travel to ensure my mortgage was always paid.
Life’s all about tradeoffs. Who knew?
Now here’s how you can have the best of both worlds.
2. Invest in Real Estate by Buying Public Stocks
If home ownership isn’t your cup of tea, owning real estate can be as simple as logging into Robinhood and picking up a few shares of the companies that specialize in commercial or residential real estate.
Mandatory legal disclaimer: these are not investment recommendations and all opinions expressed below and above do not constitute financial advice. In no particular order, here are the public stocks I own related to physical real estate:
STOR – STORE Capital Corporation – a Real Estate Investment Trust (REIT) which owns and operates more than 2,500 commercial locations across the U.S. such as office space, retail, and manufacturing locations.
SPG – Simon Property Group – another REIT which mainly owns malls. Yes, malls. The kind for which COVID seemed like the death knell. However, malls, especially high-end ones in affluent areas like SPG operates, might just be an excellent asset to own as we come out of our COVID-induced, 2-year hibernation and are itching to spend all that money we’ve been saving from stimulus checks and zero travel expenses.
These malls are poised to take advantage of “the great dispersion” as more families move to the suburbs and want access to unique shopping experiences. Malls could once again become experience, entertainment, and community hubs.
LEN – Lennar Corporation – a homebuilder and manager of multifamily rental properties. This is a bet on millennials not all wanting to own homes, as many will want to rent them due to the convenience and affordability.
INVH – Invitation Homes Inc. – another bet on the residential rental market. This company makes it easy for renters to have a full-service suite of on-site management like you’d find in an apartment, but the privacy of a single family residence. I believe this will be a growing market in the coming years as more people move more often, work remote, and want flexibility in their lives.
ABNB – AirBnB, Inc. – this company needs no introduction but I admit they are an interesting choice for real estate. The amount of international exposure it has is the main reason I like it. I figured if housing demand continues to increase and supply remains limited, the value of owning a piece of the global residential travel market will also increase.
ABR – Arbor Realty Trust, Inc. – I own ABR for one reason: the dividends (7.60% at the time of this writing).
3. Invest in Real Estate through a Private REIT
Fundrise is probably a familiar name to you even if you don’t invest with them.
Fundrise is a private REIT.
Real estate investment trusts (REITs) own, operate, and/or finance income-producing real estate across specific sectors. Many of the companies I mentioned above are public REITs. A real estate investment trust is a way to invest in real estate passively, unlike owning a home or running an apartment complex yourself. As owners of REITs, we earn a portion of the income produced without having to go out and buy, manage or sell the property themselves.
You get updates when they buy or sell new property and quarterly reports of the state of real estate where they are investing. It is one of the better consumer-centric platforms in investing.
A private REIT is simply one that is only made available to certain investors or through certain channels. Fundrise has made a name for themselves over the last few years by making private REITs accessible to everyday investors like you or me. But be aware, the money you invest in them is more liquid than owning real estate directly, but less liquid than a savings account.
In fact, during the COVID outbreak in Spring 2020, they suspended withdrawals for a certain holding period. This is perfectly allowed within their terms. Limiting withdrawals ensured the platform didn’t lose their ability to continue to have the capital necessary to operate. It’s actually one of the reasons I like the investment. You should not be putting money in that you need anytime soon. It is for serious investors that want long-term appreciation.
The latest withdrawal rule is as follows:
Therefore, you should not consider this an investment you can hop in and out of at your leisure.
Bloomberg had a really interesting article about their Los Angelos developments recently, too.
If you want to open an account with Fundrise, you can use my referral link to get 90 days of fees waived: fundrise.com/r/ggqv43 and I also get fees waived so it’s a win-win. Do your own research, though.
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