Pillars of Wealth: Investing in Real Estate Without Owning a Home
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Liam Gibson
Wealth of Geeks
Data shows that over the past 150 years, those who’ve bought up real estate have seen a handsome return on their capital.
One academic study that assessed asset classes between 1870 and 2015 across several wealthy countries, including the U.S., found that property’s rate of return was around 7% per year. This meant real estate marginally outperformed stocks, which brought in returns slightly under 7% over the same period, yet with much more significant price stability.
However, with house prices skyrocketing since the pandemic, a larger portion of younger people are getting shut out of the market. According to the most recent census data, Millennial homeownership rates stands at 48.6%, a significantly lower rate than the homeownership rates of previous generations at that age.
While housing prices have cooled somewhat in the past year, the country is short millions of homes, and this chronic supply shortage will likely continue to buoy prices.
Fortunately, buying a quarter-acre block is not the only way to get exposure to one of the safest and best wealth-generating assets. There are numerous ways to invest in the real estate sector without the trappings of traditional ownership. This post will look at some of the advantages of alternative methods to property investment.
The property market is becoming more accessible through alternative investment models, which have several advantages.
One perk is that it enables investment in geographically remote areas far from your locale. With crowdfunding platforms like RealtyMogul, investors can access some of the fastest-growing urban areas in the U.S. from the other side of the country without ever setting foot in the neighborhood.
Owning a physical property requires a lot of maintenance and many hours spent on site on repairs, so remote ownership frees up more time and saves investors much effort and hassle. It also requires less upfront capital, so younger investors can enter the market sooner and compound their returns for a longer time horizon.
Pooling Together
Real Estate Investment Trusts ( REITs) present a much more affordable option for young newcomers and lower the barrier to entry for those who can’t afford a downpayment for a mortgage but still want exposure to the property market in their portfolio.
With REITs, it is possible to own a portion of a fund that owns a slew of commercial properties and residential properties. The rental income collected on these properties is then passed on to investors, just as companies pay quarterly dividends to shareholders. There is a range of REITs, from public to private, with most holding equities in properties, while some specialize in holding mortgages.
Real Land
Another often overlooked investment property option is to buy a plot of farmland.
Unlike a city apartment or suburban house, farmland presents an open canvas for potential development. The land can generate agricultural output, either supporting livestock or cultivating fresh produce for profit.
Farms can not only diversify your asset mix but serve as a great stabilizer of your portfolio. Cryptocurrencies and stocks may soar up and down while property markets in cities boom and bust, but food-producing land is always needed to feed the population. Hence, farmland’s ancient function value endures as the breadbasket of a society, ensuring farmland holds its value over time.
Farmland can be used to generate rental income too, either by leasing it out to farmers or converting it into another usage, such as a camping site or a space for building several Airbnbs offering unique stays during travel.
As a tangible asset, farmland can be passed down through the generations and is easily divisible if it needs to be split between different beneficiaries.
Take Note
Instead of taking out a home loan, you can issue one with mortgage notes. These allow investors to purchase a mortgage loan from a bank and effectively become the lender themselves, earning payments from the borrower. This way, the investor earns interest on the mortgage loan, just as a bank would.
This can offer a relatively passive form of income through regular payments from the borrower. With interest factored in, mortgage notes can bring in higher returns than other assets, such as stocks or bonds.
However, mortgage notes are not very liquid. If the investor needs money on hand, notes can’t be easily converted into cash. There is also the risk that the borrower defaults on the loan, which would put the noteholder in the red.
While owning a home has long been a pillar of the American dream, it is not becoming a reality for many young people across the country. Breaking into the property market is tough, and with property prices and interest rates potentially staying higher for longer, things are not looking any easier.
