Rising Rents, Flat Home Prices, and Owning REITs In My Portfolio

The NYT Economix blog points out that rents are rising again according to inflation data from the Bureau of Labor Statistics. The chart included doesn’t have zero on the y-scale, but a value of 100 corresponds to rent from 1982-1984. Rents nationwide are about 40% above their values in 2000. I recently saw the last house I used to rent on Craiglist and the rent was up 15% from 4 years ago.


Credit: NY Times, Bureau of Labor Statistics, IHS Global Insight

There is definitely an increase in the number of renters, and perhaps there is also an overall psychological shift in that less people think homeownership is a part of the American Dream. Perhaps this means it’s a better time to be landlord? Home prices are still hanging around 2003 levels:


Credit: Marketwatch, S&P/Case-Shiller Home Price Indices

Although I know many successful people who are landlords, I don’t now if I’m cut out for it. However, I do like buying real estate investment trust (REITs), which allows me to collect rent like I collect stock dividends. (Not familiar with them? Here’s a post all about REITs.) I even did a comparison post of rental property vs. REZ, a residential ETF. I see REZ has done quite well recently.

Now, I’m not pushing REZ, and don’t own it myself. I continue to get my real estate exposure through the low-cost, passively-managed Vanguard REIT Index Fund, available both as a mutual fund and ETF. It tracks the MSCI US REIT Index and includes all kinds of real estate, currently holding 20% in residential ETFs that own things like apartment complexes. It like the diversification of this fund, even though it can be a rough ride, and in a struggling economy things like commercial properties will be harder to rent out.

Here’s the growth of $10,000 chart of both the Vanguard REIT Index Fund and the S&P 500 index, from mid-1996 to today. This type of chart accounts for total return, including dividends.

The REIT fund has done better than the S&P 500, which some may find surprising (or not) given the housing bust. As you can also see, they don’t always move together, which is good. Including REITs and rebalancing has offered a way to achieve better returns even if you like a simple buy and hold portfolio. I can’t guarantee that this type of helpful diversification will continue in the future, but I’m happy with my current portfolio right now, and am glad to be a lazy “landlord” in this manner.

Comments

  1. I do think that right now is a great time to invest in rental properties if you’re so inclined to be a landlord.

  2. The only thing I don’t like about REIT is the interest is counted as ordinary income for tax purposes in comparison to other dividends that might be counted as qualified dividends (hence taxed at 15%).

  3. I am a landlord and I do have money tied into Vanguard REIT Index Funds. I think of them both as part of my portfolio. The REIT fund has stayed a lot more stable than most of the other funds at the current risk level and am happy to continue to hold on to this index fund. As for being a landlord, I use a property manager that I have to pay a monthly management fee which is minimal. They take care of the property and I can choose how much involvement I want. The bad thing I if you look further into your numbers is that rental prices WERE going up because more people were wanting to rent than buy (or could not buy). This trend is slowing down in some parts of the country because now the rental market is starting to get saturated. Previously I could get a new tenent in my house in 10-20 days. Now it will take 15-45 days to get a tenent in because there is more competition hitting the market. This means I have to be more competitive on my rental pricing to ensure I have residual income coming in.

  4. REITs have run far too high far too fast.

    The yield on REITs is the lowest it’s been in eons.

    And they are more exposed to any continued downturn than anyone else.

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