Rental Investments Are Thriving as Homeownership Is Dying

In early October, the Census Bureau released 2010 figures revealing American homeownership is at its lowest level since the Great Depression. Specifically, the U.S. homeownership rate fell to 65.1% in 2010. That's compared with a nearly 70% peak in 2005 and 2006 that might never again be achieved now that funny-money mortgages have evaporated.

You might think it's an overreaction to call homeownership "dead" when more than half of Americans still are living in a property they own. But a closer look at the numbers reveal the trend is serious indeed.

For instance, home ownership rates are at their lowest for middle-aged adults - the very people who should theoretically be buying right now. Older Americans have bought years ago with the intention of staying in their homes until they are six feet under. As this generation of homeowners passes away, no one is replacing them.

Equally disturbing is that there is a large population of homeowners who desperately want to sell now - but are just waiting for a better market to pull the trigger. If the losses these homeowners face were smaller, they too would be out of the homeownership game.

Homeownership might not be dead yet, but it is certainly headed down that road.

So how can investors use this to their advantage? Simple: Buy into mutual funds, ETFs and individual stocks that focus on the booming rental market.

Rents are skyrocketing, as evidenced by one of my previous columns. Supply is shrinking, and rents should go up another 4% nationwide this year on top of previous gains. The landlord business is pretty good these days, and investors would be wise to share in the profits.

Here are four ways to cash in on the death of homeownership by investing in rentals:

Buy a Rental Mutual Fund
If you don't feel comfortable jumping into the real estate market, have a mutual fund do it for you. Funds such the Fidelity Real Estate Income (MUTF:FRIFX), Eaton Vance Real Estate Fund (MUTF:EIREX) and Neuberger Berman Real Estate Trust (MUTF:NBRFX). This guarantees not just a play in the rental market, but a steady stream of income because these funds invest the lion's share of their assets in real estate investment trusts, or REITs. By law, REITs must deliver 90% of their taxable income back to shareholders - and since rental REITs have stable cash flows and strong businesses, that means reliable dividends.

Buy a Rental ETF
Although the options are fewer in the exchange-traded fund arena, investments like the SPDR Dow Jones Wilshire REIT ETF (NYSE:RWR) indexes U.S. real estate much like REIT mutual funds, and also boasts a nice dividend yield over 3%. ETFs also are very flexible, so it's easy to sell these funds and redeem your investment if you wish.

Buy Individual REIT Stocks
If you don't want the diverse play of a fund or ETF - either because you have identified better growth options or individual companies with better yields - then consider adding specific real estate investment trusts to your portfolio. For instance, Simon Property Group (NYSE:SPG) has topped both the broader market and many REIT funds with its 13% gains so far in 2011. Then there's Ventas (NYSE:VTR), which boasts a nearly 5% dividend yield. If you want to weight your portfolio toward these options, forgo a fund and jump right into the REITs.

Buy a Rental Property

This is the most direct play of all. If you are handyman willing to suffer service calls or a thorough fact-checker willing to screen applicants to ensure your tenant doesn't trash the place, you always can consider buying a property and renting it out. In some markets, the rental rate would be on par with your mortgage payment - meaning that if the refrigerator doesn't go bust, you essentially have zero costs as someone else pays the bank and you enjoy the equity built over time in the property. Of course, real estate is highly illiquid these days, so don't expect to get that investment cash back quickly if you need it.