About the only asset that is performing well this year is residential real estate. Stocks have entered bear market territory, bonds have had a terrible year, and crypto is suffering as well. The only asset that has been safe as houses has been, well, houses. While the S&P 500 is down for the year, home prices have been appreciating in the mid-to-high double digits, depending on the housing index used. How can investors get involved in residential real estate?
Buying property is the best way to gain exposure to residential real estate
The most obvious way is to buy property. While the number of homes for sale has been limited by a lack of homebuilding over the past decade, there are still properties out there. While mortgage rates are up tremendously over the past six months, if you look at the 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 starter 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 buy a two- to four-unit property and lives in one unit while renting out the others. FHA loans allow the borrower to put down as little as 3%.
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Many investors are reluctant to buy property simply because landlording can be a headache. Maintenance costs add up, borrowers may skip rent and have to be evicted, and no one likes calls at 2 a.m. about a backed-up toilet. Luckily, there are ways to gain exposure to residential real estate via the stock market.
American Homes 4 Rent allows exposure to real estate via a stock
American Homes 4 Rent (AMH -0.65%) 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" endeavor and it was hard to really manage properties at a large scale. American Homes 4 Rent has clusters of homes in cities that have characteristics like tight housing supply, strong job growth, and attractive pricing. The company is increasingly building properties specifically to be rentals.
The rapid rise in home prices means American Homes 4 Rent's book value per share is much higher than what shows up on its balance sheet. The average home in its portfolio was bought in 2015, and since then the FHFA House Price Index is up 71%. Rising home prices allow the company to increase rents, so that helps drive profitability going forward.
The advantage 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 a property is always a long, and often arduous, process. The seller generally has to pay 6% in realtor fees and the process can take several months. Holders of American Homes 4 Rent don't have that issue. The stock has a dividend yield of 2.2% -- which is low for a REIT -- however, the company is plowing more money back into the business. The stock also gives the investor more diversification than a property will. 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.
