With Rising Home Prices, Is Real Estate Investing Still a Smart Strategy?

Billionaire industrialist Andrew Carnegie once said that 90% of all millionaires earned their fortune through owning real estate. Real estate investing continues to be one of the best …

Houses lined up

Billionaire industrialist Andrew Carnegie once said that 90% of all millionaires earned their fortune through owning real estate. Real estate investing continues to be one of the best ways to make money and grow wealth.

Tax benefits, appreciation, diversification, and a hedge against inflation are just a few reasons people invest in real estate. Many like owning tangible assets rather than stocks or bonds.

For investors, there are plenty of choices, including single family properties, commercial real estate, and Real Estate Investment Trusts.

There are properties available across a wide range of budgets. For example, a mortgage for a home in Virginia Beach, VA with a median housing price of $310,000 will be significantly less than a home in Ventura, CA where the median price is above $700,000, or in San Francisco, which now boasts a median selling prices of $1.3 million.

Let’s take a look at the different types of real estate investing, check on the current status of markets, and hear what some experts have to say for each.

Investing in Single Family Properties

Home values in the U.S. have skyrocketed over the past year. The median sales price for a home in May 2021 was slightly more than $350,000 and a median sales price that was up 23.6% from a year ago, according to the National Association of Realtors (NAR).

With mortgage rates still at some of the lowest levels in the past 50 years and pent-up demand after a year of living with the threat of COVID, most experts predict at least another year and a half of rising prices.

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Not everyone agrees. A recent survey revealed that 41% of those responding predicted the housing market bubble is set to burst sometime in 2021 and start prices on the downward slide. More than a quarter felt downward pricing would not occur until 2022 and 13% did not forecast another housing market crash.

The economics that led to the housing crisis in 2008 were significantly different than in today’s marketplace. In 2008, the housing crash was caused by subprime mortgages that were being written in record numbers, then bundled and resold at a startling pace. The industry has learned a lot since then and is more cautious about lending. Also, the government is more experienced in protecting the housing market, such as the forbearance and market modifications it enacted during the pandemic.

Investing in Commercial Properties

The commercial real estate market is recovering more slowly and has not yet reached pre-COVID levels, according to the NAR.

Activity for large-scale commercial real estate declined 28% year-over-year in Q1 2021. Transactions for portfolios exceeding $2.5 million declined for all types of properties except for hotels. For smaller commercial real estate portfolios of less than $2.5 million, transaction volume declined by just 1% year-over-year.

Pricing is also down with properties on average going for 6% less than a year ago.

Experts expect the market to continue to recover, but fear employment trends may impact certain sectors of commercial properties. With companies downsizing and increasingly allowing employees to work from home, there are some concerns that organizations will need a smaller footprint. The Wall Street Journal, for example, reported that a record 42 million square feet of office space was put on the market in Q2 and Q3 of 2020.

Real Estate Investment Trusts (REITs)

There is also increased activity in Real Estate Investment Trusts (REITs). A REIT is backed by a corporation that uses investor funds to buy and operate income-producing properties. They are bought and sold in the marketplace like stocks. These have also become attractive for investors that want to include real estate in their portfolio but do not want to make a traditional real estate transaction.

REITS, in essence, work similarly to dividend-paying stocks. They must pay out 90% of their taxable profits in the form of dividends to maintain their REIT status, which allows them to avoid paying corporate income tax.

Equity REITs buy and own buildings. Mortgage REITs provide real estate financing and may include mortgage-backed securities.

While REITs declined by more than 5% in 202, according to the FTSE Nareit All Equity REIT Index, many fund managers have a positive outlook for REITS in 2021.

Are Real Estate Investments Right for You?

Currently, high equity valuations and negative yields on many government bonds are not making for attractive offerings. Interest rates, expected to remain low through at least the end of the year, will continue to make real estate investment an attractive option for many commercial borrowers.

Investors always have to weigh any investment against other potential opportunities. Any investment is subject to risk.

Whether real estate investments are right for you and your investment portfolio will depend on the totality of your finances, risk tolerance, and investment objectives.


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