Inv101 – WSS/HTMW – 1-11 Real Estate

1-11 Real Estate

If you are a homeowner, your home is probably where you keep most of your wealth. Everyone hopes to be able to sell their home for more than they paid for it – which means that every homeowner is a real estate investor!

“Real Estate Investing” means making money based on buildings or properties. There are four main ways to be a real estate investor – a “Speculator”, a “Landlord”, a “REIT Investor”, or a “Mortgage Investor”.

The Speculator

A “Speculator” buys an asset believing that the price will go up and sell it later. They “Speculate” that the price will rise. In terms of real estate investing, most homeowners are speculators (unless they plan to live in their home until they die, passing it on to their children).

Beyond regular homeowners, “house flipping” is also speculation (where a person buys a run-down house for cheap, fixes it up, and sells it for a profit). While there are many “get rich quick” schemes based on house flipping, it can also be a viable career strategy. You can also act as a “speculator” by investing in construction companies, where the value of their stock increases as the value of the properties they can build goes up.

The last level of speculators is reserved for the rich. These are property developers – buying either empty land or properties and building up that property and surrounding area to make it more valuable, before selling it off. Property developers usually consider much larger areas than just one house, and so it requires a lot of cash to operate.

The Landlord

If you have ever rented, you know what a landlord is – someone who owns property and rents it out to someone else. Landlords can be huge companies, or small landlords who own a couple apartments that they rent out, and they are also very common.

If you ever purchase your own home and decide to move out, you will face a choice; do you want to sell your current home and use the revenue to finance the new one, or do you want to rent out your first home and collect the income? This revenue stream is a key concept of real estate investing.

The REIT Investor

Real Estate Investment Trusts (or REITs) are investment vehicles specializing in real estate. REITs are kind of like ETFs for property (and can be bought on the stock market). They invest in mixes of property development (as a speculator) and owning a lot of property that they rent out (as a landlord). REITs combine the money of many investors into a single fund so they can have the cash to tackle major real estate investments.

Some of the most popular REITs include:

  • DR Horton (DHI)
  • Toll Brothers (TOL)
  • Lennar (LEN)
  • Pulte Homes Inc (PHM)
  • Centex Corp (CTX)

The Mortgage Investor

When we talked about bank accounts at the beginning of the course, we used the example of the bank issuing a loan for a mortgage – someone else borrowing money to buy a house. However, banks usually do not just keep that mortgage for all 30 years, collecting the check every month. Instead, banks often combine a bunch of mortgages into a package and sells them to investors.

The banks get money immediately, which they can then loan out to other customers. The investors get the steady revenue stream of the mortgage payments for a long period of time.

Mortgage-backed securities act more like bonds than stocks, where you buy a single security and receive constant income. Not every brokerage offers mortgage-backed securities, but they are accessible to the average investor if you know where to look.

Mark's Tip

If you plan on living in a city for more than 5 years, you should buy a house. After you have a house and you have started to grow your nest egg, buy a vacation home somewhere that you want to go to for the next 20 years. Just as you should never put all of your money in one stock, you should never have all of your personal wealth in the stock market. Use REITS in your stock portfolio if you are seeking high dividend yields, but ALWAYS get out before the next recession hits. Home building stocks are generally leading indicators and their activity gives you an indication of where the economy is heading.

About Kevin Smith

Kevin is the content manager for Personal Finance Lab and is from Chicago, Illinois. He has a Master's Degree in Economics from Concordia University in Montreal, Canada. In addition to an economics background, he has also built training manuals to prepare finance companies for licensing requirements in mortgage loan origination and insurance sales.