Forbes – July 26, 2021
Across the country, would-be first-time homebuyers are facing disappointment, as they realize the rapid rise in home prices has left them priced out of the market. Many house shoppers are losing bidding wars to cash buyers. Only about 549,000 homes were available for sale nationwide in June 2021, a number that is down 45% over the last four years.
Some Americans who’ve saved up tens of thousands of dollars for a down payment that they now realize is insufficient to purchase a home are asking themselves: should I find another way to invest in real estate other than buying a house?
Some commentators celebrate this idea, suggesting it would be less risky for most Americans to be renters, instead of homeowners, and those renters could invest money instead in REITs (real estate investment trusts) instead.
About 2 in 3 homes in the United States are owner-occupied, but homeownership can be risky. The average family has 42% of their wealth tied up in their house , which means they’re not very diversified: if the house has physical problems, or if the neighborhood’s home value declines, that homeowner has put a lot of their eggs into one basket.
But across the United States, the cost of rent is often high relative to the price of houses. According to the U.S. Census Bureau , the median asking rent for vacant rental units in Q1-2021 was $1,226, compared to a median asking sales price for vacant homes available for sale of $200,900.
Let’s look at what would happen financially if you bought a modest house, versus if you rented the same type of house from a corporate landlord like Invitation Homes , the largest owner of single-family homes in the United States, investing the cash that would have been your down payment into the Invitation Homes REIT (INVH). To make things simple, we’ll look over the last four years, from April 2017 to March 2021, the end date of Invitation Homes’ most recent quarterly earnings statement.
Renting While Investing vs. Owning a Home
Invitation Homes, a publicly traded REIT spun off from the world’s largest private equity firm, Blackstone BX, owns about 80,000 houses around the country, more than 12,000 of which are in the Atlanta metro area. According to their most recent quarterly earnings statement, their houses are worth a combined $16.3 billion, and they collect $1.9 billion in rent annually, which means that when they rent out a house worth about $200,000, they charge around $1,900 in rent each month.
But the mortgage payment for a house worth $200,000 is only about $960, assuming a 4% interest rate, a 20% down payment, and $132 in monthly property taxes. Someone renting an Invitation Homes property will be spending about twice as much every month in rent as their monthly mortgage payment would be if they owned the home.
The renter, though, would have the chance to invest their down payment amount.
If instead of making a $40,000 down payment, the renter invested $40,000 in INVH on April 2, 2017, their investment would have grown to $63,385 by March 31, 2021, a healthy 12% growth rate per year.
The homeowner would directly benefit from the rising house prices during that time period when he or she went to sell her house. A house purchased for $200,000 in April 2017 would be worth about $261,000 by March of 2021. Because of the power of leverage , the $40,000 down payment became more than $100,000 in equity. And remember, the homeowner had monthly housing payments that were roughly half the cost of the renter’s monthly rental payments.
When you add it all up, including the homeowner’s closing costs and costs of maintenance (but assuming the homeowner doesn’t deduct mortgage interest on their taxes), the homeowner comes out ahead by more than $60,000 over just a four year period. The longer the homeowner stays put, the better of she’ll be.
Landlords are able to charge high markups on rent, some of which gets eaten up by expenses like marketing, houses sitting vacant in between tenants, and the high cost of evicting tenants , a practice that corporate landlords engage in frequently. If you rent your residence and invest in a property management company instead, a lot of your money will languish with middlemen.
Anybody who wants to celebrate the fact that America is becoming a nation of renters needs to reckon with the very real loss of wealth this will create for the middle class.
If You Can’t Buy A House, Don’t Double Down on REITs
In some ways, Invitation Homes is unique in that it allows investors a chance to make a “pure play” on single-family residential real estate within the United States.
Some REITs focus exclusively on residential real estate, like Invitation Homes INVH, but about 80% of the REIT market is commercial or industrial real estate, buildings including offices and shopping malls.
Although 2020 was a boom year for housing prices, the REIT sector overall fell 2% in 2020, while the S&P 500 was up 16% over the same time period.
“If you invest in REITs, you’re almost never investing in home price appreciation. You are really investing in commercial space, and more specifically, you are investing in the financing of commercial space,” said Dan Egan, vice president of behavioral finance and investing at Betterment . As a result, he explained, “REITs are very sensitive to interest rate moves, because they usually have a lot of embedded finance leveraged in them.” For that reason, he said he wouldn’t recommend someone saving up to buy a house to invest in REITs specifically, especially not under the false assumption that if home prices go up, that their REIT is likely to go up too.
And REITs are already a part of the S&P 500, which means if you own S&P 500 index funds, you already have some exposure to this asset class.
Although everyone’s situation is different, if you’ve decided to keep renting instead of buying a house, and have some extra cash to invest, a broadly diversified portfolio, instead of a heavy concentration of REITs, is probably the way to go.
This article is for informational purposes only, and is not intended as tax, investment, or financial advice.
By Elena Botella, Senior Contributor
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