As home prices continue to surge across the U.S., our readers have sent in a lot of questions.
Will the trend continue?
How can I invest to profit from higher home prices?
What if I don’t want to buy real estate directly?
What happens if interest rates rise?
Will higher prices make homes unaffordable for the middle class?
So I wanted to take the time this week to focus on all things housing here at Rich Retirement Letter.
Today, we’ll talk about a handful of housing stocks you can buy right now. After all, we’re not in a housing bubble yet.
And if a bubble is going to form in the future, that means there’s a tremendous opportunity for you to profit by jumping in today!
The Housing Bubble May Come… But Not Yet
Every time I hear an investor talk about a bubble in one market or that next, the term is used negatively.
No one likes a bubble it seems.
Because when we think of a market bubble, our minds immediately go to the dot-com crash of 2000, the financial crisis of 2008, or some other major market selloff.
It seems we forget that in the years leading up to a bubble, investors can make a lot of money!
Instead of being driven by speculative mania, home prices are higher because of good old-fashioned supply and demand.
And since these are long-term forces that can persist for years, I’m not at all worried about the housing market crashing any time soon.
What I am worried about is the possibility of you missing out on the investment gains that are possible as this market trend moves steadily higher.
That’s why this week, we’re bringing you as many opportunities related to the housing market as possible — so that you can grow your wealth as this trend continues.
And if we do wind up with a bubble, you’ll be on the right side of history, because you’ll be able to grow your wealth as the bubble inflates.
And of course, we’ll be on the lookout for signs of risk as our profits accumulate.
For now, I want to introduce you to two key stocks that are direct beneficiaries of higher home prices.
The Home Builder With a Secret Wealth Cache
One of the most well-known homebuilders in America is Lennar Corp. (LEN). The company delivered 52,925 homes last year, generating more than $22 billion in revenue.
In today’s white-hot housing market, LEN is naturally profiting from strong demand and soaring profits.
At the end of the most recent quarter, LEN’s management team told investors that the company received new orders for 15,570 homes.
This leaves the homebuilder with a backlog of 22,077 homes that have been ordered but not yet delivered. So as we move through 2021, investors have every reason to expect this strong trend to continue.
One of the things I like most about LEN is the company’s profit margins.
For the last quarter, the company netted a 25% profit on its homes sold. This compares to a 20.5% profit margin a year ago and goes to show how surging home prices are naturally helping to drive LEN profits higher.
For the year ahead, Wall Street analysts are expecting earnings to grow to $11.41 per share.
And yet, shares of LEN are trading near $100. This means you can buy LEN for only 9.1 times next year’s earnings. That’s a bargain in my book!
The company also pays investors dividends of $1.00 per year. So if you buy shares of LEN today, you’ll get a yield near 1%.
That may not be a huge amount of income, but with LEN’s future profits surging higher, there’s plenty of room for that dividend to increase.
So on the surface, LEN looks like a great value stock in an area of the market that is growing steadily.
But there’s one more reason I love shares of LEN right now. It’s a special business line that most investors aren’t paying attention to.
You see, Lennar recently announced a joint venture with Allianz Real Estate. This venture called “Upward America” intends to buy $4 billion worth of new homes from Lennar and rent them out to individual tenants.
This genius arrangement will allow LEN to profit by selling the homes it builds and then to continue to collect revenue from the rental payments that tenants make.
And as housing prices continue to move higher, the value of these homes will naturally rise. And that means LEN’s position in this joint venture will create more wealth for us as shareholders.
Bottom line, LEN is a great way to invest in profits from building and selling homes.
And it’s also a backdoor way to hold a long-term position in real estate — one that will steadily appreciate as home prices rise.
A Gold Mine of Home Equity
The second housing play I want to make sure you’re aware of is Invitation Homes (INVH).
I’ve written about this company several times in the past. And I hope you’ve been able to grow your wealth through this direct play on housing. I
But if you missed this opportunity earlier, it’s not too late!
INVH was created by private equity firm The Blackstone Group (BX). During the financial crisis, BX bought up billions of dollars worth of foreclosed homes in key real estate markets.
After remodeling the homes, BX rented them out to tenants and now collects cash flow from the rental payments.
In 2017, Invitation Homes began trading as its own stock. And shares have recently surged to new highs.
I love INVH as an income play because the company is structured as a real estate investment trust (or REIT).
This means the company doesn’t have to pay corporate taxes. The company is also required to pass its operating earnings to us as investors through regular dividend payments.
While the rental profits and dividend payments are certainly an attractive part of INVH’s business model, there’s a much larger source of wealth that investors benefit from.
As home prices rise, the underlying value of INVH’s portfolio of homes increases.
And as an investor in INVH, you truly own a portion of these homes. So the value of your investment continues to rise as home prices surge.
This is a lot like owning shares of a gold mine. Yes, the mining company earns a profit when it produces gold and sells it in the market.
But investors know that when the price of gold rises, all of the underground gold becomes more valuable.
And this makes the mining stock worth more even if profits don’t immediately move higher.
Home prices are moving higher because of supply and demand dynamics. At the same time, a return of inflation will also help to cause home prices to appreciate.
So by owning shares of INVH, you’ll not only profit from the rising housing market, but you’ll also be taking a big step towards protecting your wealth from inflation.
It’s a great time to be investing in American residential real estate. And these two plays can help you get started generating wealth from this important area of the market.
Tomorrow, my colleague J-Rod will share a couple of his favorite breakout plays tied to the housing market.
And I’ll be back to you on Thursday with some alternative ideas on how to use this trend to grow and protect your retirement savings.