Rentals thrive as homeownership wanes

Here are 4 ways to profit and how to protect your finances.

By InvestorPlace Oct 19, 2011 10:33AM
By Jeff Reeves, InvestorPlace.com


In early October, the Census Bureau released 2010 figures revealing American homeownership is at its lowest level since the Great Depression, with the homeownership rate falling to 65.1%. That's compared with a nearly 70% peak in 2005 and 2006 that might never again be achieved now that funny-money mortgages have evaporated.


You might think it’s an overreaction to call homeownership dead when more than half of Americans are still living in a property they own or are carrying a mortgage on. But a closer look at the numbers reveals the trend is serious indeed, pushing more Americans into rentals.


For instance, homeownership rates are at their lowest for middle-aged adults, the very people who should theoretically be buying right now. Older Americans bought years ago with the intention of staying in their homes until they are six feet under. As that generation of homeowners passes away, no one is replacing them.


Further, there is a large population of homeowners who desperately want to sell now but are just waiting for a better market to pull the trigger. If the losses they face were smaller, they would be out of the homeownership game as well.


Homeownership might not be dead yet, but it is certainly headed down that road.


So how can investors use this to their advantage? Simple: Buy into mutual funds, ETFs and individual stocks that focus on the booming rental market.


Rents are skyrocketing. Supply is shrinking, and rents should go up 4% nationwide this year on top of previous gains. The landlord business is pretty good, and investors would be wise to share in the profits.


Here are four ways to cash in on waning homeownership by investing in rentals:


Buy a rental mutual fund
. If you don’t feel comfortable jumping into real estate, have a mutual fund do it for you. Funds such the Fidelity Real Estate Income (FRIFX), Eaton Vance Real Estate Fund (EIREX) and Neuberger Berman Real Estate Trust (NBRFX). This guarantees not just a play in the rental market but a steady stream of income, because these funds invest the lion’s share of their assets in real-estate investment trusts. By law, REITs must deliver 90% of their taxable income back to shareholders, and since rental REITs have stable cash flows and strong businesses, that means reliable dividends.
Buy a rental ETF. Although the options are fewer in exchange-traded funds, investments like the SPDR Dow Jones Wilshire REIT ETF (RWR) indexes U.S. real estate much like REIT mutual funds and boasts a nice dividend yield over 3%. ETFs also are very flexible, so it’s easy to sell them and redeem your investment if you wish.

Buy individual REIT stocks
. If you don’t want the diverse play of a fund or ETF — either because you have identified better growth options or individual companies with better yields — then consider adding specific real-estate investment trusts to your portfolio. For instance, Simon Property Group (SPG) has topped both the broader market and many REIT funds with its 13% gains so far in 2011. Then there’s Ventas (VTR), which boasts a nearly 5% dividend yield. If you want to weight your portfolio toward these options, forgo a fund and jump right into the REITs.
Buy a rental property. This is the most direct play of all. If you are a handyman willing to suffer service calls or a thorough fact-checker willing to screen applicants to ensure your tenant doesn’t trash the place, you can always consider buying a property and renting it out. In some markets, the rental rate would be on par with your mortgage payment — meaning that if the refrigerator doesn’t go bust, you essentially have zero costs as someone else pays the bank and you enjoy the equity built over time in the property. Of course, real estate is highly illiquid these days, so don’t expect to get that investment cash back quickly if you need it.



Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the aforementioned stocks. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

 



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1Comment
Oct 20, 2011 4:50AM
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One reason existing refinancing efforts have fallen far short of their goals is that Fannie and Freddie continue to charge homeowners high, risk-based fees up front to refinance their loans you can avoid this if you check your rates and fees at 123 Refi before you sign




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