Many real-estate investors buy just one rental property. Associated Press
Two-and-a-half years into the U.S. housing recovery, the real-estate industry is rolling out new ways for individuals to invest in the property market.
Brokers, property managers and others are helping buyers purchase houses in distant cities and manage them as rentals for a fee. Publicly traded trusts that collect rental income are selling shares to investors. And crowdfunding startups are matching buyers with willing lenders.
The latest pitches generally aim to eliminate the day-to-day headaches of being a landlord, and the potential payoff can make the concept worth considering. Investors can buy in for the price of a single-family home or a single share of stock.
But the plunge in U.S. home prices in the financial crisis should be a fresh reminder that bets on housing can sour in a hurry.
The latest deals often don’t depend on home values going up, which sets them apart from the house-flipping strategies that cost many home buyers dearly when the market collapsed. Yet investors could still face losses if, for example, the economy weakens and renters can’t keep up with their payments.
Those who buy a rental property and then need their money back down the road could also get burned. Unlike stocks, bonds and mutual funds that can be sold quickly, it can take months to unload a house even in a strong market. And if prices decline, investors may lose a chunk of principal for good.
Despite the risks, investors worried about pricey stocks and meager bond yields can be lured by the prospect of a steady income stream and average annual returns that could range from 5% to 15%, if things go well.
Don’t go overboard. Investors should maintain a diversified portfolio that also includes stocks, bonds and cash. Single-family homes shouldn’t exceed 5% of their investments, not including their primary residence, says Jeff Sica, president of Sica Wealth Management in Morristown, N.J.
For the moment, the supply of rental homes and the demand from renters are high. Some 14.9 million single-family homes were occupied by renters in 2013, up 31% since 2006, before the U.S. housing market collapsed, according to data released this past week by the U.S. Census Bureau.
The vacancy rate on single-family rentals fell to 7.3% in the second quarter, down from 10% in the fourth quarter of 2008, according to the bureau.
Here’s what you need to know about making money in the rental market.