Risk and diversification
Owning a single rental home provides little diversification, as you’d own one type of property in a single geographic location. You can expand on that by owning multiple rentals, preferably spread among different areas. The risk-reducing benefits of diversification ramp up greatly through REITs and real estate funds.
But while a single REIT might own hundreds of properties, they often concentrate in a single industry, whether it’s apartment complexes, office buildings, industrial parks, hospitals or whatever. A REIT thus won’t have as much diversification as a real estate fund with stakes in various types of businesses. Some real estate funds even go global with investments in foreign nations.
Many REITs have generated returns over the long haul matching or exceeding those of the broad stock market, but they occasionally get clobbered, too, as happened in 2022 amid rising interest rates. For example, REITs holding industrial, residential and self-storage properties all were down more than 25% on average for the year, according to NAREIT. Office REITs suffered even more, with an average loss of nearly 38%, as the work-from-home trend emptied many buildings.Tax benefits of real estate investment
Real estate taxation is a complex topic unto itself and rental properties are treated significantly different from REITs and real estate funds.
With rental properties, owners may deduct a range of expenses including repairs, property taxes, mortgage interest, insurance, management fees, depreciation and travel costs to and from the property. If rental income exceeds your costs, you pay taxes on the difference. When you sell a property, you would face taxes on any profit, and depreciation taken over the years must be recaptured, meaning taxes would apply on those amounts. The Internal Revenue Service describes the many tax details of rental properties in IRS Publication 527.
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As an investor in a REIT or real estate fund, you wouldn’t deal with all that. Rather, your tax involvement would look similar to that with other stocks or mutual funds or exchange-traded funds, in that you would faces taxes on dividends plus gains if you sell at a profit. One notable feature of REITs is that they’re required to pay out nearly all of their net income to shareholders. Dividends thus tend to be hefty, which can be welcome, especially if you’re in a low tax bracket.
If you own REITs or real estate funds within an Individual Retirement Account or workplace 401(k) plan, taxes are deferred on any reinvested dividends. But when you eventually withdraw money, taxes apply. As noted, REITs trade in the stock market, and they’re treated like most other securities from a tax standpoint.Cash needs and loans
To purchase even a moderate rental property, you could need tens of thousands of dollars for a down payment, possibly more, and you would face broker commissions and a laundry list of closing costs. Then there are ongoing needs to hire contractors, pay property taxes and insurance, possibly make mortgage payments and so on. All that requires a lot of money, though income would flow in as tenants pay rent.
With REITs and even real estate funds, the cash needs are much different. Stakes in these investments typically cost a few thousand dollars, possibly less, and there’s no requirement to ante up additional money. In fact, you can often purchase shares in REITs or real estate funds through a workplace 401(k) retirement plan, in small increments that might feature company-matching funds.
There’s no mortgage either, which means no application process, no monthly payments and no impact on your credit record. By contrast, those factors would apply on rental properties bought with loans.Appreciation potential and liquidity
Real estate values historically have risen over time, whether it’s for individual homes, apartment buildings, industrial parks, office buildings, warehouses and hospitals, among others. However, as Pagan noted, returns can vary greatly by property type and geographic location, even by neighborhood or street.
REIT prices reflect the values of the properties held. But because REITs are securities that trade in the stock market, their values also are swayed by what investors there are willing to pay. You can buy or sell REIT shares at virtually any time, providing much greater liquidity compared to the often-lengthy process of rental-property transactions.
Now could be a good time to buy REITs and real estate funds, with prices for many property types having fallen sharply last year under the onslaught of rising interest rates. As interest rates stabilize further or start to fall, “that should be beneficial for REITs,” Pagan said.
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This article originally appeared on Arizona Republic: Looking for new investment options? Here’s what to know about real estate beyond homeownership
he housing market has been volatile the past few years, but it may be stabilizing. Is now the time for you to buy or sell?
There may be some changes in the market and additional trends to consider when you’re looking for your next home or thinking about selling. Even renters may have a new view of the market this year.
So whether you’re buying, selling, or just looking around, here are some changes to keep an eye on in real estate.
Read more:1. House prices are declining
The housing market has been running hot for the past few years, but it’s finally showing signs of cooling off.
In December 2022, the median home price in the U.S. was $388,472, according to the real estate website Redfin. That price was part of a steady decline from the five-year peak in May at more than $430,00. However, prices are still high. The median home price in December was 1.4% higher compared with a year earlier and still well above the $271,852 median home price in December 2017 — five years ago.
Want to learn how to build wealth like the 1%? Sign up for Worthy to get ideas and advice delivered to your inbox.2. Rents are decreasing
It’s not just the price of buying a home that is coming down but also the cost of rent. After peaking in August 2022, the median monthly rent was $1,979 in December, according to the website Rent.
That rental price is 1.41% less compared with a month earlier, but still 4.77% more than in December 2021. But the year-over-year trend continues to decline, which could be good news for renters looking to move this year.
Pro tip: If you’re renting and don’t want to move, there are ways to help pay your rent. Getting help to pay your rent will help you manage current monthly costs or save for a down payment on a home at a later date.3. Housing inventory is still low
One of the reasons the market hasn’t fallen any further may be the low inventory for homes. There were 260,064 homes up for sale in December 2022, which is a 28.4% decline compared with a year earlier.
That continues a downward trend for the number of houses being added to the market each month. And the number of homes newly listed for sale in December is quite small compared with the recent peak in June 2022, when more than 800,000 homes were added to sale listings.4. Mortgage rates still relatively high
Last year saw a dramatic increase in interest rates because of overall inflation and Fed interest rate hikes. Although inflation has cooled a bit, mortgage rates are still on the high end for potential buyers.
The average 30-year fixed-mortgage rate in February, for example, is 6.50%, according to Mortgage News Daily, which reflects a 2.5% increase compared with a year earlier. In some markets, the higher mortgage rate may offset any advantage a buyer earned from the median price of a home going down.5. Mortgage applications are in flux
Rising interest rates may be scaring off some potential buyers. The number of mortgage applications rose 7.4% for the week ending February 8, according to the Mortgage Bankers Association, but the week before saw a 9% decrease.
One possible reason for the seesaw numbers is continued volatility in the market and changes in the 30-year fixed mortgage rate. First-time homebuyers may be nervous about locking into a mortgage and new home amid this volatility. Other buyers may be worried about a possible recession this year, but there are ways to prepare for a recession if that’s a concern.6. Small markets aren’t retreating quickly
During the pandemic, Americans moved to quieter towns and areas with a lower cost of living while working remotely. But as more workers are being called back to the office, they’re moving closer to work but not selling their pandemic oasis.
Some may continue to hold on to their homes as an investment, a short-term rental, or simply a second home, which means some smaller towns and cities aren’t seeing the decline they expected just yet. The failure of a housing market to retreat could be pricing more locals out of the market.7. Buyers could have more power in the market
With prices cooling off, the balance of power may be flipping back to buyers instead of sellers.
If you’re a buyer, that could mean you’re able to negotiate on price or take more time to decide if a particular home is the right one for you. You also won’t have to waive an inspection, which some buyers were willing to do recently to secure a home in a hot housing market.
Pro tip: A tip for first-time homebuyers, as well as seasoned buyers, is don’t skip the inspection. You want to make sure there aren’t any major issues with a home before you buy or you could face big bills that could cause you to live paycheck to paycheck for far too long.8. Housing construction is slowing down
Housing construction couldn’t keep up with demand in the hot market in recent years, but new housing starts have slowed as the market starts to slow.
The number of housing units that were started in 2022 was 3% lower compared with all of 2021. And building permits were also down, declining 5% in 2022 compared with a year earlier, according to the U.S. Census Bureau.Bottom line
Whether you’re thinking about buying or selling a home, you should start looking at comparable homes so you know how much it may cost you to buy a home or sell one in the current market.
Remember that real estate — from home prices to mortgage rates — changes constantly so be willing to adjust to the market in order to have a successful purchase or sale.
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This article 8 Big Changes Happening to Real Estate You Should Know originally appeared on FinanceBuzz.
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Rapid home-price growth and soaring mortgage rates led to a dramatic downturn in housing demand throughout 2022, leading experts to speculate that the entire US real estate market could implode.
While the housing slump is escalating this year, there’s a brighter future ahead, billionaire real estate fund manager Grant Cardone told Benzinga, as published by Yahoo Finance. People like him, he said, will re-enter the market before it enters crash territory.
“Investors will step in to pick up single-family homes at lower prices with less competition,” Cardone said in a statement, according to Benzinga. “That being said, there will be no housing crash. Investors, like myself, will save the day and step in to buy the homes.”
In 2022, surging inflation and a series of Federal Reserve interest hikes dampened demand in housing by regular buyers and big investors who were snapping up homes by the thousands. Indeed, data from real estate brokerage Redfin shows that investor purchases of American homes fell a record 45.8% year-over-year last quarter — surpassing the decline seen in 2008 as a housing bubble was bursting.
However, there may be some relief on the horizon with 30-year mortgage rates holding below last year’s peak of 7.08%, and by at least one prediction, heading all the way down to 5.20% in 2023.
“It’s possible that investors will start to wade back into the market this year given that mortgage rates have ticked down from their 2022 high — especially if home prices show signs of bottoming,” Sheharyar Bokhari, a senior economist with Redfin, said in a report last week.
With housing affordability at a record low, home sales and prices have begun to retreat nationwide, especially in pandemic boomtowns like Austin, Texas, Phoenix, and Bozeman, Montana. Each of those places saw an influx of remote workers, robust population growth and unprecedented home price appreciation during the pandemic.
As the real estate market softens, strategists at Goldman Sachs projected various markets, including Austin and Phoenix, will likely see peak-to-trough home declines of more than 25%. As home prices decline, that could draw investors back into the market, per Cardone.
It’s a likely scenario as institutional real-estate investors have earmarked as much as $110 billion to purchase or build single-family-rental homes in the coming years, according to an estimate from real-estate-research and investment-banking firm Zelman & Associates.
The sum — which could add almost 400,000 homes to the existing inventory of roughly 700,000 single-family properties controlled by corporate landlords such as Pretium and Invitation Homes — is the largest ever amassed by US real estate investors. The investors have been so aggressive with their purchases they’ve been accused by consumer groups and local lawmakers of boosting costs for regular homebuyers.
Single family homes may be a new frontier for the billionaire known for authoring books such as How to create wealth investing in real estate.
According to Cardone Capital’s website, its real estate portfolio consists of 11,903 apartment units across 36 multifamily properties along with over 500,000 square feet of commercial office space.