Since 2008, the U.S. government has tried nearly everything–including an $8,000 tax incentive for new buyers–to get housing going, and with good reason. The National Association of Home Builders estimates that about three jobs are created every time a new home is built. Just think of all the U.S. jobs that are created for every house; Realtors, Bankers, Construction Workers, all of them benefit when building permits are on the rise.
Now they are rising again, and not just for residential housing, all of real estate is slowly recovering. More than the broad economy will win if real estate continues rising, savvy investors will win too.
Luckily, being savvy in real estate is sometimes synonymous with being safe.
The Way of The Chicken
The media is once again writing dramatic, and impressive, stories of “house flippers” making quick gains. But that level of commitment and risk is more than most people want to dive into.
If you’re looking to invest in residential real estate, with less risk, take the chickens way out and consider a residential REIT like Equity Residential (NYSE:EQR) . For those who don’t know, REIT stands for Real Estate Investment Trust. These trusts trade like shares of stocks but, by law, they must pay shareholders 90% of their profits.
I look at Equity Residential (NYSE:EQR) as a safer way of land lording. The trust owns about 150,000 apartment units; it simply holds one of the largest multi-family real estate portfolio’s in the U.S. I like rental property, especially apartments, for real estate investing. No matter what happens to the economy people need to rent a place to live. During the past few years, as housing has struggled in the U.S., rental prices have actually increased. Buyers just couldn’t qualify for home loans so apartment demand increased.
By investing in Equity Residential (NYSE:EQR) you can be a landlord of sorts. If you hold shares you will benefit from increased rents because your dividend will go up. When property values go up and properties are sold, your shares will benefit from a rising book value.
By investing in Equity Residential (NYSE:EQR) you’ll be like a landlord, but you won’t have to deal with tenants or banks.
This REIT pays a current dividend of 2.7% and shares have been on quite the run. So you aren’t buying “cheap” right here. But if you have a truly long-term time horizon (5 years), you’re unlikely to be disappointed with your returns.
Super Chicken
Looking for an even safer way to invest in real estate? Get diversified with a real estate ETF!
SPDR Dow Jones Global Real Estate ETF is an international REIT and real estate stock ETF. The trust holds a wide range of REITs that make sense right now, from Public Storage (NYSE:PSA) to Health Care REIT, Inc. (NYSE:HCN), it covers a wide range of REITs.
There’s some safety in the diversification that ETF’s like this provide. If your primary goal is income, capital preservation and yield protection should be of utmost importance to you.
This trust also holds international real estate investments which is crucial because real estate markets don’t typically move together. One example of this is the real estate market of 2008-20012. During that time, as the U.S. and European real estate stagnated, the Chinese real estate market was on fire. Now, the U.S. real estate market is slowly ticking up and, some analysts feel, China may be slowing down.
The dividend yield for this ETF currently sits just over 4%, it swings (sometimes dramatically) from quarter to quarter, but the average annual yield is typically between 4-5%.
Not for Chickens
It’s important to note that not all REIT investing will be stress free and simple. Simon Property Group, Inc (NYSE:SPG), for instance, is a REIT investment that would need to be watched quite closely. Simon Property Group, Inc (NYSE:SPG) owns a real estate portfolio that consists largely of shopping malls.
The shares have performed quite well for some time, trading near a 52 week high, and the REIT pays a competitive yield of 2.8%. It also owns some great properties; I can attest to Woodfield Mall (near Chicago), which is always packed with customers.
That said, despite all the positives for Simon Property Group, Inc (NYSE:SPG), it still owns property in a rapidly changing real estate environment. Online shopping is growing faster than retail. The Amazon.com, Inc. (NASDAQ:AMZN)’s and eBay Inc (NASDAQ:EBAY)’s of the world are forcing some traditional retailers (Best Buy Co., Inc. (NYSE:BBY), etc.) to switch to smaller storefronts, or go out of business completely. None of this is news; it’s just something that needs to be considered.
If you’re looking for a safer way to invest in real estate, I’d recommend passing on Simon Property Group, Inc (NYSE:SPG) for now. It’s just not quite as steady as an ETF, or a multi-family REIT, at this point.
Get your Chicken on!
Statistics show that new real estate construction is up 25% from 2009, but new development still lags 2006-07 levels by nearly half. There still could be room to run, this still could be a good time to invest, and you don’t have to be a thrill seeker to do so.
There’s no shame in avoiding saws, paint guns, and hammers. You can invest in real estate with the click of your mouse. If you invest in a REIT, or a REIT fund, with good growth prospects, your income should grow safely over the long-term.
The article Don’t Flip This House! A “Chickens” Real Estate Guide originally appeared on Fool.com and is written by Adem Tahiri.
Adem Tahiri owns shares of SPDR Dow Jones Global Real Estate. The Motley Fool has no position in any of the stocks mentioned. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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