Here's Why Single-Family Rentals Can Be A Strong Alternative To Stocks And Bonds Without The Volatility

The COVID-19 pandemic shook the investment world to its core AGAIN. Coming off a good year and ready to rock another great year, 2020 took most investors by surprise and not in a good way. 

Stock prices plummeted, and investors didn’t know which way to turn. If they bailed from the market, they’d be left with next to nothing, but if they stayed, no one knew what would happen. No matter what investors decided, the bottom line was the same - their financial life changed drastically in the blink of an eye.

No matter what happened in the world, one investment that didn’t change was real estate investments. Single-family rentals remained a strong contender throughout the crisis and continue to do so today. While housing prices may have dropped slightly, they bounced back much faster than the stock market and continue to be a low volatility investment today.

If you’re looking for a way to diversify your risk, look at single-family rentals. Even if you don’t have a lot of capital, there are ways to invest with little money out of your pocket to start. 

Why should you consider single-family rentals vs. the stock market or at least diversifying with real estate investments? It’s easy to see why.

Stocks And Bonds Are Volatile

Looking back historically, stocks and bonds are volatile. Take the S&P 500, for example. It had seen returns as high as 46.59% back in 1933 and losses as much as 47.07% just two years earlier in 1931. Even in recent years, 2019 saw a 28.8% return, but 2020 saw only a 16.6% return, and 2018 had a 6.24% loss. 

That’s a lot of volatility to handle when you’re trying to save for retirement or other lofty goals. It’s hard to predict what you’ll have and prepare yourself when you can’t predict the volatility.

Volatility can make you lose sleep at night, keep you from investing, or make you hold back on how much you invest just to prevent a tremendous loss. It doesn’t have to be that way.

Real Estate Is Less Volatile

While real estate has its ups and downs, it doesn’t change as much as stocks and bonds. On average, rent prices increase between 3% and 4% year over year, giving you greater returns on your investments. Stocks and bonds don’t have the same cash flow, which makes them a more volatile investment.

With increasing rents, you increase your monthly cash flow, which is money in your pocket. This is outside of the appreciation most properties do, especially if you hold onto them long-term. 

Why Does Rent Keep Increasing?

With the state of the economy and the stock market, you’d assume rents would decrease just like everything else has over time - but they did the opposite. Why?

There is a great demand for rental properties, especially from millennials. Today, homeownership rates among millennials are 8% lower than their predecessors. With homeownership rates down, millennials must rent, and when demand is high, prices increase.

Why do millennials not own properties? There are various reasons, including:

• Less accessibility
• Less capital available to buy homes
• The desire for more freedom

What if millennials could have their cake and eat it too?

Roofstock Marketplace makes it easy for millennials to invest in real estate and have the flexibility they desire. Roofstock removes the barrier to entry, making it easy for any millennial (or older) to invest in single-family properties.

How Roofstock Makes Investing Easy

Investing is scary - there’s no doubt about it. You put your money out there and hope that it will grow. But, there’s always that chance it won’t, and you will lose money.

Wouldn’t it be great if the answers were out there for you? If someone told you the risks of an investment, wouldn’t it be easier to decide?

Enter Roofstock - the platform that gives you all the information you need. 

Roofstock does all the hard work. Sellers come to them to sell their property, but Roofstock doesn’t take every property. They do the legwork. They vet the property, making sure all of the following are in place:

• The home meets all Roofstock requirements to be a ‘certified property.’
• The homeowner had all necessary repairs recommended by Roofstock inspectors completed.
• The home has tenants in it already, giving buyers cash flow from day one.

Roofstock also calculates everything for you, so you know what you’re getting into when choosing a property. You’ll know the expected rent, expected expenses, and potential net cash flow.

Roofstock makes it easy to make informed decisions.

Invest In Assets That Cost More Than The Capital You Have

When you invest in stocks or bonds, you can only buy what you have enough money to pay for, right?

For example, you want to buy ten shares of Amazon.com, Inc. AMZN, but you only have $100 - you’re out of luck. You can’t buy even one share of Amazon. You may find a broker that offers fractional shares if you’re lucky, but owning less than one share of Amazon isn’t going to get you very far.

With real estate, it’s different. You can invest in assets that cost much more than the money you have available.

Here’s how.

You use borrowed money, aka a mortgage, to buy a property. You can use conventional financing or a hard money lender. It depends on your qualifying factors and how much of your own money you have to invest.

Typically, you need at least 20%, sometimes more depending on where you’re investing. But a 20% investment isn’t much when you look at the big picture.

Let’s say you found an investment property on Roofstock Marketplace for $200,000, and you are pre-approved to put down 20% to buy it. You need $40,000 to invest in a $200,000 property. You earn the appreciation the property makes year over year, and as you pay the mortgage down, build even more equity in the home.

Now let’s take it a step further. What if you have $100,000 to invest? Should you buy one property in cash or spread out the money over a few properties?

If you spread it out, you could invest in possibly three properties for the same $100,000. Let’s keep it simple. If each property is worth $150,000, you’d own a total of $450,000 in assets versus $100,000 if you paid cash.

You’ll have to deduct your expenses, including the real estate taxes, insurance, and repairs, from your cash flow, but you’ll still come out ahead in a less volatile investment.

Reasons Single Family Homes Are Less Volatile Than Stocks

When you think of the stock market, what do you think?

Do visions of large surges and major crashes come to mind? Now, what about real estate? Do you have the same vision?

Probably not.

Sure, real estate can fluctuate and even fall tremendously (look at 2008), but it doesn’t often happen and certainly not multiple times a day like stocks. Real estate also doesn’t react to political agendas, companies with ‘bad news,’ or many major economic issues. 

While real estate prices fluctuate, they change slowly over time, and frequently they appreciate unless something drastic happens in the industry. 

Single-family home rentals also provide cash flow right away. This is different from stocks. When you buy stocks or bonds, you have a piece of paper or an online dashboard that shows ownership - that’s it. You don’t have anything accumulating cash flow until you sell the asset, or if you’re lucky enough, you buy a dividend stock and periodically receive a payout when the company’s profit margins are high.

Real estate pays cash flow right away if you invest with Roofstock Marketplace. The homes on Roofstock already have tenants. When you take ownership, you instantly become a landlord, earning cash from the start.

Finally, real estate is a tangible asset - you can touch it and see it. While the home itself may fluctuate in value, the land it’s on won’t. The land won’t go anywhere - even if the house does, and since we can’t create more land, its value remains.

Real Estate Provides Passive Income

Passive income is music to any investor’s ears. Sure, there’s some work involved after you buy the property, but if you take advantage of long-distance investing, you will hire a property management company to handle the work for you.

This leaves little to no work for you. Sure, you may have to talk to the tenants periodically or schedule things with the property management company, but that’s not active work. So in exchange for your upfront legwork, you’ll earn a passive income from the moment you take ownership until you sell it.

There may be times in between that you have vacancies and have to find new tenants since no tenants last forever, but overall, real estate provides passive income. 

Because it’s a passive investment, many people start with one investment home but end up with an entire portfolio of them, realizing the net cash flow after paying for services, such as property management.

It’s Easy To Diversify

When you invest in stocks or bonds, there’s only so much diversification you can do. Even if you buy stocks from different companies or in various industries, a stock is a stock. If the market crashes, you lose your money.

When you invest in single-family real estate, it’s easier to diversify. As you build your portfolio, you can invest in different markets, especially if you’re using Roofstock Marketplace. With listings all over the country, you can invest in your home town, a few states over, or across the country, investing coast to coast.

This is the smart way to invest in real estate since no two real estate markets are the same. If one market falls, it doesn’t mean the market in another state will too. One market may do well while another declines, or they both may do well.

If you leverage your investment, you don’t need a lot of capital to diversify, again unlike stocks. To invest in multiple stocks and other investments to diversify, you need a lot of capital unless you invest on margin, which has strict qualifying requirements. When you invest in real estate, you can make a down payment and borrow the remaining funds.

You can take it a step further, too. Let’s say you start with one property and let it appreciate. You can borrow from it as you earn equity, using it as a downpayment on another property. If you keep doing this, you can own a handful of real estate properties.

Bottom Line

If you’re looking to avoid volatility, diversify your portfolio with single-family real estate investments. You don’t have to be rich or even know what you’re doing to invest in real estate. Roofstock Marketplace makes it simple.

Once you decide you want to invest in real estate, browse the marketplace and see which properties are a good fit for your needs. Get your financing, and you are on your way to your first real estate investment. Keep the ball rolling by continually investing in new properties, and you could have a diversified and low volatility portfolio.

Read more about Roofstock: Roofstock Review

Photo by Birgit Loit on Unsplash