Residential real estate can be an excellent way to generate both income and long-term growth, but being a landlord isn’t for everyone.
Fortunately, there are several ways you can get exposure to housing without actually buying a property thanks to the stock market. Here’s an overview of the different types of housing stocks you can invest in and what you should know about each one…
Why not invest in housing by buying property?
To be clear, investing in rental housing can be a great way to generate income and build wealth. In full disclosure, I own a few investment properties myself.
Having said that, buying investment properties isn’t for everyone, and there are some good reasons you might want to invest in housing through stocks instead. Just to name a few of the most compelling reasons:
- It takes a lot of money to buy a rental property. While it isn’t required in every single case, the majority of lenders want at least 20% down when buying an investment property. And costs like origination fees tend to be higher. If you’re buying a $200,000 investment property, you should plan on needing at least $50,000 to close.
- Investment properties are time-consuming. You can hire a property manager to deal with the day-to-day operations, but looking for, evaluating, and actually buying a property can be a big drain on your time.
- Rental housing is an illiquid type of investment. It can take months to sell a home unless you want to accept a low price.
- As a rental property owner, you have to deal with vacancy risk, maintenance costs, and other uncertain expenses.
Why choose housing stocks instead?
In simple terms, investing in housing through stocks eliminates the major pain points of owning rental properties. Going through the four downsides to property ownership I mentioned in the last section:
- With housing stocks, you can invest with far less capital than you’d need to buy a property. You can technically buy just one share of a stock, and with a few thousand dollars you could put your money to work in a few different housing stocks of your choosing.
- There’s a bit of research required to invest in stocks, but it’s likely to be far less time-consuming than buying an investment property. I’ve done both and can tell you firsthand that there’s no comparison — investment properties involve a ton of work, and for an extended period of time. For example, last time I bought a rental property, I exchanged no less than 70 emails with my lender, had to drive to the property at least a dozen times before closing, and spent several hours in my real estate agent’s office.
- Stocks are perhaps the most liquid type of investment you can make. If you choose to sell a stock, you can typically do so with a simple click of the mouse. The sale will take a second or two (if that long), and it will take place at full market value.
- You won’t have to worry about the inner workings of the business if you buy a stock. If a property has maintenance issues, there’s someone employed to deal with it.
Furthermore, investing in housing through stocks also helps diversify your investment strategy. Let’s say that you buy a duplex as an investment property. If one of those units sits vacant for a few months, that’s 50% of your potential income that you aren’t collecting. On the other hand, if you buy a real estate investment trust that owns 50,000 apartment units, the effects of any specific vacancies are negligible.
The same concept applies to homebuilders — if a homebuilder runs into a problem selling one of its homes, it’s an issue. However, it’s a far smaller issue than if you built one house with the intention of selling it and were unable to do so.
In other words, investing in housing stocks allows you to spread your money out among a collection of assets, not just a single property.
Types of “housing stocks” you can invest in
When it comes to investing in housing through stocks, there are three main ways you could go…
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