5 Ways to Invest in Real Estate Through the Market
I spend a great deal of time talking to people about the enormous wealth that can be generated through real estate investing. We talk about flipping homes and buying rental properties, and I explain how these investments can produce lucrative returns for them well into their retirement years.
But sometimes people don’t seem that interested, because they don’t have the time to remodel foreclosures, or they don’t want to be bothered with calls from tenants when the pipes leak, or are afraid they’ll have to chase tenants to get their rents. So I am frequently asked if there are alternatives, where they can still invest in real estate, but without all of the headaches and the time allotment that comes with it.
My answer is YES! There are several ways to still invest in “real estate” via the stock market. You can buy a stock and hold it for years if you like, and nobody is going to wake you at midnight because there’s no hot water.
Here then, are 5 ways to invest in real estate through the stock market:
Investment #1: Home Builder Stocks.
You see their signs up all the time for new developments, but did you know that several home building companies, such as Lennar (NYSE:LEN), KB Home (NYSE:KBH), Ryland Homes (NYSE:RYL), and D.R. Horton (NYSE:DHI) have public stocks that are traded on Wall Street every day?
Some of these companies pay investors a small quarterly dividend as well. Their prices tend to fluctuate with the rise and fall of the real estate market. With 2015 being an excellent year in real estate, Ryland is up 19% and Lennar is up 17.2%.
Investment #2: Real Estate Exchange Traded Funds (ETF).
Some people fear individual stocks because stock prices can be quite volatile, and losses of 20% or more are fairly common if we get a bear market. One way to temper the volatility is to purchase an Exchange Traded Fund (ETF), which is a basket of stocks that contain a number of similar companies in a particular country, asset class, or sector of the market.
Suppose you like the idea of buying Home Builder stocks, but are afraid to buy just one, or don’t know how to tell which ones will perform better in the future. To solve this problem, you can diversify by purchasing the SPDR S&P Homebuilders ETF (NYSE:XHB), which is a basket of several dozen real estate related stocks, including all of the homebuilders cited above. While the XHB may not rise as much as individual stocks, it also won’t lose as much value during a stock market or real estate downturn. In 2015, the XHB is up 5.38%, and its worst quarter saw only a 2.76% decline.
Investment #3: Real Estate Related Retail Stocks.
Some retail stocks are very much tied to the performance of the real estate market. Three that come to mind immediately are retailers Home Depot (NYSE:HD), Lowes (NYSE:LOW), and Bed, Bath, and Beyond (NASDAQ:BBBY).
But even when homes aren’t selling, people may be renovating their current homes since they feel they may be living in them for awhile longer. So these companies will often perform well, even in slower real estate markets. Home Depot stock rose from $27 a share in 2010 to $111 in 2015, a gain of 311% in only five years!
Again, if buying individual stocks is a little scary, real estate related retail stocks can be found in the XHB as well.
Investment #4: Housing Materials Companies
The companies that manufacture building materials used in residential and commercial real estate also benefit from real estate booms, as more construction is undertaken to meet the demand. These include companies like Beacon Roofing Supply (NASDAQ:BECN) and Louisiana- Pacific Corp. (NYSE:LPX).
But these companies stocks can also excel in lean years, because their stock price appreciation is often related to weather events. When major hurricanes, tornadoes, and other natural disasters destroy large areas of cities and towns, eventually the homes, offices, and stores that are decimated will be rebuilt. That means more roof shingles, wood siding, and other building materials will be needed in order to replace damaged structures. Demand for building materials elevates prices and the shareholders of these stocks then prosper.
Investment #5: Real Estate Investment Trusts (REIT)
Real Estate Investment Trusts are stocks of companies that own and operate real estate that produces income on a monthly basis. Most often these companies own commercial real estate, such as apartment buildings, strip malls, storage units, or office buildings.
REITs are known for paying high yield dividends on their shares, as they are mandated by law to return 90% of all profits back to the shareholders. It is not uncommon to have a REIT paying a dividend yield from 5% to 10%. REITs may not appreciate as much in stock price, but the large dividends make up for it, and provide investors with a strong total annual return.
Even during years of bad or mediocre performance, these dividend payments can be great income producers for one’s portfolio, and are especially good for retirees. As the baby boomers age, REITs that invest in Elderly Care residences like Nursing Homes, Senior Apartments, and Assisted Living Facilities may perform particularly well.
One such REIT that I would recommend for its long term dividend track record is Senior Housing Properties Trust (NYSE:SNH). SNH owns and manages a number of Senior related facilities. Its current annual dividend of $1.56 per share is an 8.8% return. Even during the difficult real estate years of 2008-2012, SNH never reduced their dividend, and even raised it from $1.40 to $1.56 per year over that period of time.
So there you have five ways that you can still participate in real estate investing without ever having to raise a hammer, or deal with tenant calls at Midnight. Whether you are looking for price appreciation, or monthly income, there are investment vehicles for all age groups and types of investors.