Shelter is a basic necessity and investing in your own shelter, and in the shelter of others, has long been a great way to build wealth. But the housing market is often volatile, a source of both opportunity and unpredictability.
Many of those factors are beyond your control, such as interest rates, national and local economic trends, rules and policy changes at all levels of government, and the effect of such macro factors on individual sectors of the real estate investing world.
But that doesn't mean you're powerless. That unpredictability is balanced by a variety of ways to navigate and invest in the housing market -- including direct investment in properties, real estate investment trusts (REITs), and homebuilder stocks.
Here are some things to consider about each option.
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1. Buying real estate directly
Millions of people own houses they rent to others through leases and short-term rentals and other arrangements, and they either actively manage the properties themselves or use a third-party manager. These property owners make their money both from the rental income and from the appreciation of the property's value over time.
While real estate investing is generally considered to be safe, to succeed in direct investing takes an understanding of the local real estate market and the capital for that purchase.
You also have to factor in expenses such as maintenance, insurance, and property taxes. Oh, and find and keep good tenants. And collect the rent. This type of investment is also not particularly liquid, taking time and money to market and sell when that time comes, too.
But do all of this well, and you may be on your way to building quite a nest egg of your own.
2. Passive income and liquidity through REITs
That's where REITs come in. These are companies that own, operate, and often finance income-generating real estate, allowing individuals to invest in portfolios of properties the same way they might invest in the stock market. In fact, a couple hundred of them do trade publicly, including many that specialize in residential properties.
REITs are highly liquid; you can buy and sell them with the click of a mouse. Tax law mandates they pay out at least 90% of their taxable income as dividends, making them a great source of reliable passive income. Among residential REITs, you also can easily focus on property type and geography if you wish.
Essex Property Trust owns apartment communities in affluent California and Seattle markets, for example, while Mid-America Apartment Communities targets the Sunbelt and has one of the country's largest apartment portfolios. There are also REITs that specialize in single-family rental homes -- American Homes 4 Rent is a big one -- and mobile home parks, including Equity LifeStyle Properties.
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3. Profiting from home construction
Another route to profiting from the housing market is investing in homebuilder stocks. The country's largest homebuilder by revenue is D.R. Horton, and it has lots of competition for investor dollars from other major national and regional builders.
Naturally, these companies' performance is closely tied to the housing market and rising interest rates have hit many of them hard in the past year or two. But they also can be very profitable growth stocks, and the demand for new housing in many markets doesn't seem likely to go away anytime soon.
Staying aligned and in control
Whether it's buying real property or shares of REITs or homebuilder stocks, be sure to keep these investments aligned with your changing risk tolerance, goals, and investment horizon.
That awareness and agility will help you profit from an essential market that you can't control, but that you can respond to wisely.
