Property investments remain one of several viable strategies in the lifelong pursuit of building wealth.
The U.S. real estate market is expected to grow at a compound annual rate of almost 5% over the next few years, opening the door for plenty of investment opportunity. However, drawbacks to buying property abound. Not only does it require a large outlay of cash initially, but property isn’t liquid.
In fact, current conditions suggest shaky ground for the property market. With mortgage costs trending higher, the incentive to purchase is missing. The result has been a decline in property values as affordability becomes a much larger concern. Therefore, it makes sense to think about ways to invest in property without buying a house.
The stock market offers opportunities to invest not only in income-generating property portfolios but also property market beneficiaries. Benefits include a much smaller upfront investment. The following options are bought and sold on the stock market, meaning accessing your cash is much easier.
House Builders
One of the most beneficial ways to invest in property without climbing the housing ladder is purchasing stock in a house building company.
These firms buy up parcels of land and then sell them off as individual properties. While the business model is relatively simple, remember that not all house builders are equally lucrative.
First, investors carefully analyze target markets when evaluating house building stocks. Those catering to high net-worth clientele are less likely to feel the sting of an economic downturn. By contrast, builders offering median pricing could see their customers slide down the value chain, or potentially hold off a purchase altogether.
Also, location is a key factor to consider. House builders may see margins decline as house prices sputter, but in certain locations, housing shortages prop up demand. For example, the U.K. faces an enormous housing shortage, making house builders relatively confident of firm market demand.
REITs
A Real Estate Investment Trusts (REIT) presents another smart option to invest in property without actually buying a physical building.
Generally trade publicly, REITs offer investors a well-rounded portfolio of income-generating properties. Similar to a mutual fund, a manager oversees the portfolio, picking and choosing opportunities.
REITs are also bound by certain rules. These include requiring primarily property investments that derive most of their income from rent or real estate sales and paying out the bulk of their revenue to shareholders.
This investment method holds advantages in addition to the liquidity mentioned above. The key benefit is diversity. While one might be able to afford a single investment property, the average investor is unlikely to build a portfolio of several investment properties. This offers some insulation if one of the properties suddenly becomes unprofitable.
Keep in mind that most REITs specialize in a particular area of the property market, so a slowdown for one tenant is likely to signify a wider issue.
Materials Makers
Widening your investor lens, you could consider the building suppliers if you want to invest in property without buying a house. Materials makers can thrive, particularly in times of economic turmoil.
Given they’re a step removed from the housing market, the companies supplying the bricks and machinery needed to build houses are slightly more insulated. This holds particularly true in areas of solid demand such as housing shortages. Further, materials makers don’t depend quite as heavily on house prices. As long as houses are being built, they get paid.
Plus, many materials makers have their hands in several pies. While builders tend to focus solely on one demographic, materials makers supply a whole range of customers within both residential and commercial properties. But the pendulum swings both ways. Although materials makers will benefit from an uptick in demand, they don’t always make money when house prices rise sharply. So although a safer bet than house builders, materials makers can still feel a pinch in a volatile housing market.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
