Real estate can look like the perfect investment. You buy your home, and it can make you rich over time. Better still, you buy some property -- which appreciates over time, too -- and then you sit back and collect rent checks month after month after month. You probably realize that it's not quite as simple and easy as that, but you might not appreciate just how difficult it can be to get wealthy through real estate. And you might not know that you have a more promising option, too. So read on.
Your home isn't a great investment
Let's start with the American dream of owning a home. It's a common one, because as of the end of 2014, about 64% of American households had made a big investment in real estate and owned their own home. It's a fine dream, too, as it's great to have a roof over your head that you can call your own, where you can raise a family and not have to deal with a landlord. Just don't think that the building will make you wealthy -- because odds are, it won't.
According to Yale economist and housing expert Robert Shiller's extensive data -- spanning the years from 1890 to 1990 -- the value of American homes, adjusted for inflation, didn't really rise much at all over the entire century. In the post-war period since World War II, the numbers are a bit better, with home prices averaging annual growth of about 5%, which, adjusted for inflation, is closer to 1.5% or 2% annually.
If you're thinking, "Well, at least the homes didn't lose value," remember that many did. These are just averages, and while some people do see their properties appreciate a lot over time, many lose money. Remember, too, that there's an opportunity cost involved. Over the past century or so, the stock market has averaged annual growth of close to 10%. Your money would likely have grown far faster in stocks than in property.
Being a landlord isn't for everyone
The same long-term promise applies to rental properties you might buy as well -- though you might be counting more on all the rental income coming in for your reward. If so, keep these factors in mind:
- You probably won't be able to or won't want to increase the rent each year, because you'll want to keep your property competitive with similar ones and if you have good tenants, you'll want to keep them. (You'll find that a reliable $1,200 per month can be preferable to an iffy $1,350.)
- While rent checks will roll in, you'll also be cutting a lot of checks, and many times landlords don't end up with a sum that seems worth all the effort they expended. You'll be paying property taxes and will have to insure the building. You'll also have to pay for repairs when a pipe bursts and soaks a ceiling and rug, and you'll you'll pay for routine upkeep, too, such as new paint and carpeting every few years, and new appliances when old ones wear out.
- Remember, too, that there will be months when the property is vacant, when you won't be receiving checks. Finding new tenants can take time, and it's not easy to find great ones. Many will frequently be late to pay their rent and you may have to chase them down routinely. Certain personality types are better suited to landlording than others – it's not great for unassertive confrontation avoiders, for example.
When you factor all these things together, including all the financial outlays, you might find that owning rental properties doesn't seem worth it.
Consider these easier real estate investments
So what should you do? After all, the old saying is true, that they're not making land any more. There clearly is some money to be made in real estate. One great option is investing in properties via REITs -- real estate investment trusts. They're publicly traded companies that own and sometimes manage properties, and by law they must pay out at least 90% of their income to shareholders in dividends.
If you invest in a REIT, your money won't be tied up the way it is when you own property -- where it can take a long time to sell and get your money out, and where you can't just sell part of a house to generate a little money. Instead, you can buy and sell as many shares of REITs as you want, whenever the stock market is open.
There are lots of REITs out there, focused on sectors such as retail, health care, offices, apartments, and more. Here are a few you might look into, as a start:
- HCP is a health care-focused REIT, recently yielding 5.3%. It owns senior housing, medical offices, life science buildings, nursing homes, and hospitals.
- National Retail Properties is focused on commercial retail properties, with more than 2,000 of them geographically diversified across 47 states. It recently yielded 4%.
- W. P. Carey, recently yielding 5.5%, invests in a wide range of commercial properties, such as offices, warehouses, industrial properties, retail locations, hotels, R&D facilities, and self-storage properties.
- You might even invest in an exchange-traded fund (ETF) that holds a variety of REITs. Consider, for example, the Vanguard REIT ETF, recently yielding 3.5%.
So if you're drawn to real estate, give REITs some consideration. They can add useful diversification to any portfolio, and they'll generate income, too. Think of them as regular rent checks, with fewer headaches.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, 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.