The Best Way to Make Money in Real Estate (And It's Not Rental Properties)
For most people in the U.S., their home is their biggest financial asset.
But how well has that investment treated you?
Many folks would say... handsomely. Most home values have risen over the past 10 years. And lots of investors like that real estate has a "real" value and can be bought using leverage.
On top of that, we have a housing shortage in America, to the tune of millions of homes. And typically, it pays to invest in scarce assets.
The best way to play the real estate market, however, isn't to own real estate itself... or even to invest in real estate-backed investments like real estate investment trusts ("REITs").
Rather, the No. 1 way to invest in real estate is to own the stocks of homebuilders.
Homebuilders' business model is simple: Build good homes, sell them, and do so in a way that's rewarding for shareholders.
It can be an incredibly profitable business... which some investors tend to forget in the face of AI and other hot tech stocks.
That's why I brought my colleague Brett Eversole on my show this week. Brett is the editor of True Wealth, and he has covered real estate and the housing market closely for several years.
In this week's episode, we sat down and discussed one of our favorite homebuilding stocks of the past few decades... NVR (NVR).
NVR has long been a Top Stock at Stansberry Research.
And its roughly 55,000% return over the past 30 years should get your attention...
For investors, one of the greatest things about NVR is that the company can continue doing the same thing it has been doing for years... and profits will keep coming in the door.
You don't have to predict the next hot tech stock or divine investor sentiment. As we'll explain, this is a business that creates real value through efficient operations... and passes that value on to investors.
Three Big Ideas About NVR
America Is Millions of Homes Short – And Nobody Can Fix It Overnight
The U.S. is somewhere between 3.5 million and 5 million housing units short of what it needs.
And the reason why is simple math...
During the 1990s and 2000s, the country built roughly 1.5 million homes per year. That's right about in line with annual new household formation (the number of people moving out of their parents', getting married, and starting families).
After the 2008 financial crisis, that number collapsed. For the entire decade of the 2010s, homebuilders put up fewer than 1 million homes a year. In other words, each year, we were 500,000 homes short. That has left an enormous hole that the U.S. housing market is nowhere close to filling.
Housing starts have since recovered to about 1.5 million per year. But that just keeps pace with new household formation. It does nothing to close the deficit that built up over the previous decade.
That means it's hard to find an affordable home today.
It also means business is booming for homebuilders like NVR...
The Homebuilder That Threw Out the Old Playbook
NVR went bankrupt in 1992.
At the time, the U.S. was dealing with the aftermath of the Gulf War. Inflation had spiked. The economy was coming out of a recession. And housing demand was weak as a result.
Most companies would have blamed the housing cycle for sluggish earnings and gone right back to the same business model. NVR did the opposite.
Before filing for bankruptcy, NVR operated the way every homebuilder did (and most still do). It bought up massive tracts of raw land, sat on it for years, developed it, built houses, and then finally sold those houses.
That model works when land values are rising. But when the 1990 recession hit, NVR's land values fell 45%. Home sales dropped 50%. And making matters worse, the company was buried under the debt it had taken on in a leveraged buyout just a few years earlier.
When NVR emerged from bankruptcy in 1993, it made a decision that changed the entire trajectory of the company: It stopped buying land altogether.
Instead, it started buying options on finished lots from third-party land developers. That meant paying a small deposit up front... and only purchasing the lot when it was ready to build on.
In the old model, homebuilding was two different businesses: land speculation and construction. So NVR walked away from the first and doubled down on the second.
The results speak for themselves. NVR's return on assets runs around 20% a year nowadays. Competitors (that still buy land) are closer to 10%.
Build the House – Don't Rent It Out
If you want exposure to real estate, don't buy a rental property. Buy homebuilders.
The numbers make the case. Over the past 15 years, the S&P Homebuilders Select Industry Index is up about 540%. The MSCI U.S. REIT Index – the stock market equivalent of owning rental properties – is up "just" 200% over that same period.
And NVR, the best of the homebuilders, has crushed even that... up nearly 700%.
The reason homebuilders make such great investments is that building homes is a value-creation business.
You take raw materials, labor, and a finished lot... and you produce something worth more than the sum of all those parts.
Owning rental properties, by contrast, is an operations business. You get paid a risk premium to manage a physical asset, deal with tenants, and absorb the concentration risk of owning illiquid property in a single market.
Again, if you look at the numbers, NVR earns a 20% return on assets and a 30% return on equity. By comparison, large REITs earn a 2% to 4% return on assets and a 3% to 9% return on equity – and they do so with more leverage, which makes them much riskier.
Simply put, homebuilding is just the better business. And NVR is the best of the best.
Watch to Learn More
To hear more about my discussion with Brett Eversole, check out today's Top Stocks video. We talk about the supply and demand of homes in the U.S., what makes NVR's business so profitable, and how you should think about opportunities in the current real estate market...
You can watch the entire episode on our YouTube page by clicking the image above. Be sure to like and subscribe to get more of our videos.
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Straight to the Source
- NVR's most recent earnings
- Congressional reports on housing issues in the U.S. and estimates of the housing shortage
Until next week,
Matt Weinschenk
Publisher and Director of Research
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