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Where to Make Money in Housing

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For years now, the housing slump has surprised both economists and investors with its persistence and the depth of price declines. Time after time, analysts have called bottoms in the housing market, only to see further weakness.

But one fundamental fact holds true no matter what home prices do: People have to live somewhere. Rather than trying to guess when that elusive low point in housing may finally come, you might well do far better taking a look at a trend that's booming right now.

Below, I'll talk about some ways to invest in the hot part of the housing market. But first, let's take a deeper look behind some recent headlines to try to pinpoint the trends you can profit from.

Renting the American dream
Yesterday, the Commerce Department released data that showed that housing starts fell in February by about 1% compared to the previous month. The markets took this headline as cause for concern that some recent strength in the housing market might have been overstated.

But a closer look at the numbers reveals a much more interesting trend. Single-family homes, which tend to be homes that people purchase rather than rent, saw a drop of nearly 10%. But multi-family buildings, which tend to be rental properties, saw a big boom of more than 20% from the previous month. Longer-term, multi-family starts have doubled in the past year.

The trend toward rental properties reflects the increased demand among residents to rent rather than buy. With so many former and would-be homeowners still reeling from the devastation in home prices in recent years, far fewer people are willing to take on the risk of further losses. In addition, a demographic boom among young adults, who are traditionally the target audience for rental properties, as well as continued immigration from abroad are further supporting the rental market over home ownership.

Where the business is
When the housing market was strong, it was obvious where to look to invest. Companies that build homes clearly profited when the market for those homes was taking off. Since the housing bust, those stocks have largely collapsed after seeing volatile movements from repeated overly optimistic forecasts about housing that turned out to be false -- or at least premature. For instance, both Hovnanian (NYSE: HOV  ) and Standard Pacific (NYSE: SPF  ) have seen their stocks make huge moves upward since last fall, as boosts in backlogs and orders have investors getting enthusiastic about their prospects again. Yet they're still well below their 2010 highs -- let alone their much higher levels during the housing boom.

By contrast, apartment REITs are capitalizing on the popularity of renting. More than a year ago, REIT expert Ralph Block pegged Avalon Bay Communities (NYSE: AVB  ) as a strong apartment developer on both coasts with a solid balance sheet. In the past year, the shares have risen almost 20%. Similarly, Chicago-based Equity Residential (NYSE: EQR  ) has properties from California to Florida and New England.

If location is important, you can also find smaller, more focused apartment REITs. BRE Properties (NYSE: BRE  ) , for instance, concentrates on California's coastal markets as well as Seattle. If you think particular markets have better promise than others, you can probably find a REIT that covers that area.

Get paid!
Best of all, apartment REITs have something that nearly all homebuilder stocks don't right now: dividends. With yields typically in the 2% to 3% range, payouts are somewhat stingy at the moment. But getting paid while also having the prospect of capital appreciation is a great combination -- especially for investors who've suffered through the housing bust.

If you're tired of trying to pick the bottom in housing, take a close look at apartment REITs instead. If the trend away from home ownership toward renting is a lasting one, then it could be a lucrative play for years to come.

The market's full of great opportunities that can really help you go far toward saving for retirement. To see some interesting stock ideas, be sure to check out The Motley Fool's latest special report on retirement. Inside, you'll find three promising stock picks for long-term investors. It won't cost you a thing, but don't wait; get your free report today while it's still available.

Fool contributor Dan Caplinger bucked the rental trend five years ago and never looked back. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended writing naked calls on Standard Pacific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy neither booms nor busts.


Read/Post Comments (6) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 21, 2012, at 6:12 PM, topbeancounter wrote:

    The sheep follow you into the rental market. The money has already been made. Now is the time to buy, not rent. Baaaaahhhhhh.....

  • Report this Comment On March 21, 2012, at 6:58 PM, LAURABB wrote:

    Yeah try to buy a house now with anything but perfect credit and a big down payment Of course all those people who got foreclosed on have to live somewhere too Forget about buying anything for the next 3 years

  • Report this Comment On March 21, 2012, at 7:00 PM, LAURABB wrote:

    Yes all the landlords are buying up foreclosures now with cash

  • Report this Comment On March 21, 2012, at 9:55 PM, hachmujt wrote:

    @ Dan Caplinger, I agree with your theme and remind the above posters that REIT's are the subject, no down payment needed.

    I allocate a percentage to VNQ, the low cost Vanguard total REIT index to play it safe. I would like to hear your take on the interest rate risk associated with REITs. I do not think your article is complete without it.

    My understanding is that since REITs are required to pay out so much of their profits that it is difficult for them to raise capital. With that in mind, in order to raise capital don't REITs have to either borrow money or dilute shares. If we are looking at record low interest rates what kind of risk is there when they inevitably start to go up?

    Thoughts?

  • Report this Comment On March 22, 2012, at 1:15 AM, dgmennie wrote:

    Renting is NOT the way for individual investors to make money in this economy. If you think financing for a primary residence is tough (you must show massive income, put down huge amounts of cash, be always "on the hook" for ridiculous property taxes giving generous pensions and benefits to municipal employees), just try shopping for an investment property loan. Then you get to enjoy repairing plumbing and electrical systems that inevitably go bad and dealing with storm damage that your friendly local utilities won't help with and your (so-called) "insurance" won't pay for. And did I mention troublesome tenants or long, unpredictable periods when you most likely will have no rental income?

    Yada Yada Yada the little landlords are bankrupta!

  • Report this Comment On December 25, 2012, at 3:35 PM, activeREinvestor wrote:

    Being a landlord still works. Maybe better than in the past when anyone who could sign a piece of paper could get a loan. I like to say the 'dumb money has left the room' so less competition from those who do not understand the business.

    REITs might be a winner for those who want exposure to the rental sector yet they do not want to deal with tenants.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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