Home Prices Rise More Than the S&P 500: How Real Estate Investors Can Profit

Abut the only asset that is performing well this year is residential real estate. Stocks have entered bearish territory, bonds have had a terrible year, and crypto is also suffering. The only asset that has been safe as houses has been, well, houses. While the S&P500 is down for the year, house prices have appreciated in the mid to high double digits, depending on the housing index used. How can investors get involved in residential real estate?

Buying a property is the best way to get exposure to residential real estate

The most obvious way is to buy a property. Although the number of homes for sale has been limited by the lack of home construction over the past decade, there are still properties. While mortgage rates have risen tremendously over the past six months, if you look longer term, rates are still quite low. In the early 1980s, borrowers could expect to pay 15% or more on a mortgage. If you are a renter looking to buy a first home, remember that real estate is one of the few assets you can actually use. You get a growing asset and a place to live.

Another interesting option is “house hacking,” where an investor uses a Federal Housing Administration (FHA) loan to purchase a two- to four-unit property and lives in one unit while renting out the others. FHA loans allow the borrower to deposit as little as 3%.

Image source: Getty Images.

Many investors are hesitant to buy property simply because ownership can be a hassle. Maintenance costs add up, borrowers can skip rent and have to be evicted, and no one likes 2 a.m. calls about backflow toilets. Fortunately, there are ways to gain exposure to residential real estate through the stock market.

American Homes 4 Rent provides exposure to real estate through a stock

American Homes 4 Rental (NYSE:AMH) is a real estate investment trust (REIT) that buys single-family homes and rents them out. Historically, single-family rentals have been a “mom-and-pop” business and it was difficult to really manage large-scale properties. American Homes 4 Rent has clusters of homes in cities that exhibit characteristics such as tight housing supply, strong job growth, and attractive pricing. The company is building more and more properties specifically for rental.

Rapidly rising home prices mean American Homes 4 Rent’s book value per share is much higher than what appears on its balance sheet. The average home in his portfolio was purchased in 2015, and since then the FHFA home price index has risen 71%. Rising house prices allow the company to increase rents, which helps increase profitability in the future.

The benefit of using a vehicle like American Homes 4 Rent is that it gives the investor exposure to home prices while maintaining a highly liquid investment. Selling real estate is always a long and often arduous process. The seller usually has to pay 6% real estate agent fees and the process can take several months. American Homes 4 Rent holders do not have this problem. The stock has a dividend yield of 2.2% – which is low for a REIT – however, the company is putting more money back into the business. The stock also gives the investor more diversification than a property. The downside is that stock prices are generally more volatile than house prices. That said, investors who want liquid access to residential real estate should take a look at American Homes 4 Rent.

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Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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