5 Stocks to Profit From the Boom in Rentals

There's a boom going on that many investors haven't heard about: apartment rentals. As more Americans forgo owning homes and decide to rent, rental prices are rising, stoking the earnings of apartment REITs. Since the beginning of 2005, homeownership has been steadily declining from a high of 69.1% and is expected to continue downward. Also, in a survey by the National Apartment Association, 76% of surveyed individuals believed that renting an apartment was a smarter decision than buying a home. As more Americans turn to renting, rents are being driven up:

Source: Hotpads.com                                                            

Rental prices and demand are expected to continue rising as the economy strengthens. One reason is that many children of baby boomers are living with their parents as they look for work. As the economy strengthens and they find jobs, boomer children will provide a rising source of demand for rentals.

Prices will also rise as there has not been much new building in the past three years. It takes time to build new supply, and developers have not added much. Rising rents mean larger profits for apartment REITs. As such, the average apartment REIT has risen more than 40% in the past year, but there is still room to grow. Check out these five apartment REITs that are set to grow profits as rental prices continue to increase:

Company

Apartments

5-Year Growth Estimate

Yield

BRE Properties (NYSE: BRE  )

21,600

5.1%

3.5%

Camden Property Trust (NYSE: CPT  )

64,700

7.7%

3.3%

Equity Residential (NYSE: EQR  )

133,00

8.9%

2.7%

Post Properties (NYSE: PPS  )

20,200

8.4%

2.2%

UDR (NYSE: UDR  )

58,800

6.7%

3.3%

Sources: Yahoo! Finance and Forbes.com

The average yield of this group is 3%. While that's not as high as mortgage REITs Annaly Capital Management (NYSE: NLY  ) and Chimera Investments (NYSE: CIM  ) , you have less interest-rate risk with the apartment REITs, as rising interest rates don't hurt them as much and tightening credit spreads don't have an effect on the business. Also, apartment REITs have the potential for real capital appreciation as the value of the owned properties rise in the long run. In the meantime, these apartment REITs provide steady income that will likely rise as rents continue higher.

If housing prices continue falling and rents continue rising, at some point it will be cheaper to buy than rent. At that point, apartment REITs could selectively sell homes to take advantage of rising prices.

To see a broader list of companies paying out strong dividends, click here to get The Motley Fool's five-page free report, "13 High-Yielding Stocks to Buy Today."

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak.

The Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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