Estimated reading time: 9 minutes
In 2023, there simply aren’t enough homes to go around.
According to a 2021 study from Freddie Mac, we are currently sitting on a housing deficit of about 4 million homes. A more recent study from Redfin supports this claim, highlighting that there are 39% fewer homes for sale today than just five years ago.
This lack of supply has pushed home prices up and benefitted millions of savvy property owners. In recent years, many have sold their largest assets at peak value and generated eye-popping sums. Of course, that’s only one side of the story.
This lack of supply, coupled with high-interest rates, has also pushed monthly mortgage payments to levels not seen since the 1980s. Higher prices have led to a significant constriction of personal savings and left some prospective homebuyers out of the market altogether.
Fortunately, single-family homeownership is far from the only strategy to build wealth through real estate. As would-be homeowners find themselves priced out of the housing market, they may consider alternative living arrangements such as multifamily rental properties. If you’re able to secure a desirable rental property as an investment, you may be able to address their housing needs while building out your portfolio.
In this article, we’ll explore the historical benefits of homeownership, factors that led to this housing shortage, and six types of real estate investments that may help you diversify your portfolio.
Table of Contents
- The Benefits of Pairing Real Estate with an SDIRA
- Expand Your Real Estate Portfolio with an SDIRA at Entrust
Homeownership’s Historic Role as a Wealth-Building Strategy
Since 1940, personal homeownership has been the de-facto strategy for average Americans to build and retain wealth.
Historically, it’s often the first sizable asset that’s available for lower and middle-income Americans and may represent the most significant rung on the ladder toward financial freedom. About $30 trillion of the American economy is invested in homeowner real estate. For a sense of scale, that’s slightly less than the value of the entire S&P 500.
Perhaps one of the reasons that homeownership has served as such a reliable wealth-building strategy is the structure of the home loan. Unlike rent, a mortgage is a forced savings vehicle. Ordinary Americans can build equity and, in general, increase their net worth over time even when personal savings rates are only a few points above zero.
Homeownership can also act as a hedge against rising rent costs, as housing expenses remain relatively stable, or can even decrease, over the long term. Besides financial gains, homeownership offers several positive spillover effects. Communities benefit from property value appreciation, increased civic involvement, and enhanced educational investments.
Of course, homeownership is a subset of real estate investing, and this asset class is not without risks. These include the challenges of diversification, liquidity, and the potential for foreclosure due to economic hardship. Despite these hurdles, real estate remains a valuable mechanism for building wealth over time.
Factors That Led to This Housing Shortage
Multiple interlinked factors may have contributed to the current housing shortage.
The Great Recession precipitated a drop in homebuilding activity that never fully recovered. Labor shortages in construction, coupled with strict land use regulations and zoning restrictions, have also hindered new home development.
Despite predictions that higher interest rates would bring down housing prices and increase affordability, the opposite has occurred.
In July of 2020, the national median home price was $323,000 with an average 30-year fixed mortgage interest rate of 3%. With a 20% down payment, this leads to a monthly payment of about $1,100.
In July of 2023, the median home price clocked in at $416,000 with an average 30-year fixed mortgage interest rate of 7%. This leads to a monthly payment of $2,200.
So, for the average American who opts for a 30-year mortgage, buying a home is nearly twice as expensive as just a few years ago.
Many experts believe the housing supply is unlikely to meet demand anytime soon.
Millions of homeowners secured record-low mortgage rates of around 2.5-3% in 2020. They are understandably reluctant to sell and lock themselves into a much less favorable loan. Plus, the low unemployment rate and relative strength of the economy have kept homeowners financially secure. This further reduces the incentive to sell.
So, if you’re struggling to buy a home, remember that millions of others are in the same situation as you. And that type of homeownership is only one option in your toolkit to start building your real estate investing portfolio. This housing shortage may create new opportunities in other corners of the market — there are dozens of other forms of property ownership to consider.
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6 Types of Real Estate Investments to Explore
Whether you already have a rental property empire under your belt, or you’re still saving up for your first investment property, here are six real estate investment examples to expand your portfolio.
1. Multifamily Properties
If you’ve already built out and there still aren’t enough homes to go around, there’s only one thing left to do — build up.
Residential high-rises are far from the only option when it comes to multifamily real estate. Many apartments, condominiums, and townhouses are designed to be two or three stories tall. These structures are able to fit seamlessly in a single-family neighborhood while offering significantly greater cash flow for the investor.
Multi-family properties offer many unique benefits over single-unit rentals.
First, they may attract more manageable financing opportunities, especially for buildings with many units. Lenders view these assets as less risky, partially because they’re able to generate steady cash flow even with constant tenant fluctuations.
Plus, as more potential buyers are priced out due to rising home prices, the demand for rentals may increase. For instance, in 2022, rental prices increased by over 18% year-over-year. This significantly outpaced the rate of inflation and offered significant cash flow boosts for rental property owners.
Second, the acquisition process is more streamlined. Purchasing 12 single-family rentals requires 12 separate transactions, Purchasing 12 multifamily units only requires one transaction, potentially saving the investor weeks of work and months of headaches.
Further, managing multiple rental units in one location can be more efficient than handling several single-family properties spread across different areas. This centralized management can save time and resources, making multifamily investments more attractive to busy investors.
With a self-directed IRA (SDIRA), you’re able to invest in real estate with your tax-advantaged retirement funds. This allows you to pair the benefits of real estate with a powerful investment vehicle that may significantly lower your tax liability.
However, SDIRA holders often have to coordinate directly with their provider to process transactions for repairs, renovations, and related expenses. This can lead to waiting times and transaction fees that add up over time. Fortunately, there's a straightforward solution to streamline this process.
With Entrust, you can upgrade to the myDirection Card. Rather than writing a check every time you need to pay for repairs or renovations, the myDirection Card grants immediate access to your IRA funds. No waiting, no paperwork, and fewer administrative fees.
2. Self-Storage Investing
Self-storage is one of the fastest-growing types of commercial real estate investments.
One of the key advantages of self-storage investing is its relatively recession-resistant nature. During economic downturns, people often downsize their homes or businesses, leading to an increased demand for storage space.
Even without a recession, this asset may experience heightened demand as the US population ages. One of the largest generations, Baby Boomers, is beginning to downsize and say goodbye to their spacious attics and garages. As they move, many may seek out self-storage solutions to maintain their family mementos.
However, self-storage investing is not without risks. In some regions, the self-storage market may become oversaturated, leading to increased competition and potentially lower rental rates. Additionally, managing self-storage facilities requires attention to security, facility maintenance, and marketing to attract and retain tenants.
3. Industrial Properties
In 2023, an industrial property investment opportunity may stand out as a promising choice for the intrepid real estate investor.
Last year, the Biden Administration passed the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors). After relying on imports of Taiwanese semiconductors for decades, the United States is looking to get back into the manufacturing game.
Semiconductors power nearly every computer, automobile, and industry on the planet. With increasing emphasis on domestic production, American companies are urgently seeking suitable spaces for manufacturing and research facilities. Plus, with electric cars rapidly rising in popularity, auto manufacturers need millions of high-storage batteries to meet demand. This could spell a boon for factories specializing in lithium battery production.
Many industrial real estate markets are experiencing historically low vacancy rates. The rapid expansion of e-commerce led to soaring demand for warehousing and distribution centers, driven by the need for efficient logistics and last-mile delivery facilities. In order to meet demand, 600 million square feet of industrial space is currently under construction.
Limited supply, infrastructure investments, and the potential for steady income streams further contribute to the allure of industrial real estate. Its potential to provide diversification benefits, act as an inflation hedge, and tap into global trade growth trends make industrial real estate an enticing investment choice.
However, as with any investment, careful research and due diligence are essential to navigate associated risks. Look out for regional economic fluctuations and potential changes in demand dynamics.
4. REITS
If you want the cash flow and capital appreciation potential of real estate without the hassle of property management, consider exploring REITs.
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. Investing in a REIT serves as a convenient way for investors to earn dividends from real estate without direct property ownership. Similar to mutual funds, REITs pool funds from multiple investors, offering dividends without the need for property management or financing.
There are multiple types of REITs available. Equity REITs manage income-producing properties, mortgage REITs lend money to real estate owners, and hybrid REITs combine both approaches. These REITs can be publicly traded on exchanges or privately held.
While REITs offer liquidity, diversification, and steady cash flow, their limited capital appreciation potential and dividend taxation should be considered. To avoid fraudulent schemes, investors are advised to conduct thorough due diligence on any REITs they’re considering and investment sponsors recommending them.
5. Vacation Rentals
Vacation rentals can generate significant monthly income, especially during peak seasons. With the right property and effective marketing, you can charge premium rates for short-term stays, leading to higher cash flow compared to traditional long-term rentals.
Consider hiring a reputable property management company with experience in managing vacation rentals. They can handle day-to-day operations, guest inquiries, housekeeping, and maintenance, allowing you to focus on other aspects of your investment strategy. This also can help to ensure you maintain an ‘arms-length’ relationship with the property and avoid transactions with any disqualified persons, including yourself.
Regular maintenance and cleanliness are essential for providing a positive guest experience. Address any issues promptly and ensure the property is well-maintained to keep guests coming back and leaving positive reviews.
Note: If your vacation property is held by your SDIRA, you cannot allow any disqualified person to stay in the house, including yourself. Otherwise, you risk disqualifying the tax-advantaged status of all assets held in the IRA.
Ready to learn the ropes? Dive into our SDIRA Rules Guide
6. Mixed-Use Properties
Mixed-use properties combine multiple types of real estate, such as residential, commercial, and retail spaces, all within the same development. This blending of use cases can offer unique benefits for investors.
One of the primary advantages of mixed-use properties is their ability to mitigate risk. By diversifying income streams across different segments, investors can better withstand fluctuations in any single market. For instance, during economic downturns, residential properties may still generate consistent income, even if commercial or retail sectors face challenges.
Additionally, the combination of residential and commercial spaces can enhance the overall value of the mixed-use property. The convenience and accessibility of having various services and amenities in one location can make the property more attractive to potential tenants and buyers, leading to increased property value over time.
The Benefits of Pairing Real Estate Investing with an SDIRA
Today, many property owners are benefitting from significant capital appreciation and cash flow due to their foresight a few years ago. Some even combined capital appreciation with the benefits of tax-advantaged growth, allowing them to sell their properties without paying a dime in capital gains tax.
How? With a self-directed IRA (SDIRA).
Most IRA and 401(k) providers only have the infrastructure to allow investment in publicly traded assets like stocks, bonds, and mutual funds. SDIRA providers have the expertise and ability to administer transactions over a much wider range of assets, including private lending, private equity, and yes, real estate.
While you are not allowed to hold your personal home in an SDIRA, you can diversify your portfolio with real estate assets that align with your investment goals, strategies, and risk tolerance. If you don’t have adequate funds to complete a real estate purchase, there are even ways to expand your buying power. You can take out a non-recourse loan or, on the initial purchase, partner your IRA funds with your personal savings.
It's important to note that SDIRAs come with specific rules and regulations that you must follow to maintain your assets’ tax-advantaged status. For example, if you finance a real estate purchase with a non-recourse loan, you have to pay a tax known as UDFI to maintain a competitive rental property environment.
Read up on the regulations or consult with a trusted advisor. That way, you can make informed investment decisions that best suit your retirement goals.
Expand Your Real Estate Portfolio with an SDIRA at Entrust
The real estate landscape is changing.
This historic housing shortage has yielded life-changing gains for some but posed challenges for others, reducing affordability for many prospective homebuyers.
Remember, there are dozens of avenues available for real estate wealth creation. From residential high-rises to self-storage investments to industrial properties, each asset has unique advantages and considerations.
However, nearly every real estate investor should research the benefits that come with opening a self-directed IRA. These accounts enable you to pair tax-advantaged growth with your preferred assets and risk tolerance.
As long as you avoid prohibited transactions and obey the IRS rules, you could significantly reduce your tax liability. Self-directing your retirement funds could be a crucial step in your journey toward achieving financial freedom.
If you have any questions about SDIRAs or the funding process, talk to one of our IRA experts today.
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