Two undeniable trends in housing over the past decade have been the falling rate of homeownership and the rising cost of rent. As investors, how can we use this knowledge to our advantage? Sure, we could buy a rental house, but there is a lot of risk involved, not to mention the time and monetary commitments. An alternative is to buy a real estate investment trust (REIT) which buys rental properties, such as Silver Bay Realty Trust (NYSE:SBY) or Equity Residential (NYSE:EQR).
U.S. housing trends
During the past decade, the rate of home ownership has fallen from about 69% to 65%, meaning millions more renters are in the market now. As a result, the average asking price for rent in the United States has risen by about 25%.
Interestingly enough, home prices have slightly risen over the past decade, which is surprising considering it includes the worst real estate collapse in recent history. In other words, owners of rental properties are not only making 25% more rental income, but the properties are also now worth more than a decade before.
Single-family rentals are hot
One REIT specializing in housing is Silver Bay Realty Trust, which acquires, renovates, leases, and manages single-family homes. The trust's goal is to earn rental income while profiting from the appreciation of the homes' value over time.
An advantage of an investment like this as opposed to simply buying a rental home is the economies of scale it can achieved. In other words, owning a large amount of homes allows the company to cut down on management and other expenses associated with investment property ownership.
Also, single-family rental homes tend to appreciate (or drop) in price with the overall U.S. home prices, as opposed to apartment buildings, whose value is mainly derived from the rental income they can generate. The reason for this is single-family homes are viable to sell to homeowners as well as investors, while apartment buildings are strictly sold as a business asset.
Apartments: diverse and safe
This isn't to say apartment buildings don't have their benefits as well. The current U.S. apartment vacancy rate is just 4%, its lowest level in years, and rents are on the rise. Additionally, job prospects for younger workers are improving, and since this demographic traditionally rents apartments, demand should continue to climb as the employment situation improves.
Equity Residential is a REIT which invests in a large and geographically diverse portfolio of apartment properties. The trust owns almost 400 properties, representing about 110,000 individual housing units, and you simply can't beat this kind of diversity. Also, no more than 15% of the portfolio is located in any one metropolitan area, so if the rental market in say, New York City went sour, it would only cut into a small chunk of Equity's profits.
Two ways to make money
One of the best reasons to invest in housing is how you can make money in two different ways, one safe and one somewhat volatile. The rental income is the safe way to profit, as apartment rents are relatively predictable and linear over time, and the diversity of REITs adds to the safety. If you went the route of purchasing a duplex as an investment and one of your tenants moves out, you have just lost 50% of your income. If one of the REIT's tenants leaves, you won't even feel it!
The other, somewhat more risky way you can profit is through price appreciation. Real estate values have improved over the past few years, but are still well below the peak in many markets. With REITs, you have a team of experts who specialize in finding excellent real estate deals to capitalize on. This is one of the main reasons I like Silver Bay, as their buying and renovation process should produce significant appreciation in the asset value itself.
Real estate can be a very rewarding investment, and doing so by way of REITs like these helps to lower the risk involved, and puts a team of industry experts in your corner.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 Motley Fool has a disclosure policy.