How You Can Profit From The Strong Rental Market

Apartment vacancies are very low, and rents have nowhere to go but up. Here's a great safe way to get in on the action!

Mar 30, 2014 at 12:00PM

G
Source: Wikimedia Commons, Los Angeles

Apartment vacancy rates are at their lowest level in more than a decade and rent is expected to rise in the coming years. This is bad news if you're a renter, but could be excellent news if you're an investor, and you don't need to own a rental property in order to cash in. There are real estate investment trusts, or REITs, which specialize in apartment buildings, such as Equity Residential (NYSE:EQR), AvalonBay Communities (NYSE:AVB), and UDR (NYSE:UDR) allowing investors to spread their money among a basket of properties instead of just one.

Why rental housing will be a lucrative investment
The U.S. apartment vacancy rate is currently at 4.1%, which is the lowest level in over a decade.  Despite the dwindling supply of available apartments, rent has not risen too much, and the small 0.8% gain can be attributed to the job market and poor wage growth in the U.S.

However, the job market woes will not last forever. The employment situation has steadily improved since the end of the recession, and is currently at 6.7%, down from a peak of 10% in late 2009. The Federal Reserve is projecting that the unemployment rate will continue to fall, and expects just 6.3% unemployment by the end of this year.

As far as the poor wage growth issue is concerned, there is a clear trend toward higher minimum wages across the nation, and this will certainly affect apartment renters. The data suggests the majority of American voters support raising the federal minimum wage, so although the Democrats may not get the $10.10 per hour minimum they are looking for, it is likely the minimum wage (and overall income of the renting public) will rise in the near future.

The combination of the improving job market and long-overdue wage growth will result in rising rents, especially if the vacancy rate remains low. This creates an excellent opportunity to get into REITs that specialize in apartment buildings, but how should you decide which one to buy?

Which one is right for you?
One of the biggest and best REITs that invests in apartment buildings is Equity Residential(NYSE:EQR), which owns an enormous portfolio of multi-family properties. The trust owns or has interests in 390 properties with almost 110,000 total housing units. In addition, the portfolio is very geographically diverse, with a maximum of just over 15% of the properties located in any one metropolitan area.  The trust tends to focus on large cities, which are generally among the more stable markets, and the top locations of Equity's properties are Washington DC, New York, Los Angeles, and Boston.

Another of the bigger trusts is AvalonBay Communities(NYSE:AVB), which specializes in upscale apartment communities in real estate markets with high barriers to entry. AvalonBay focuses on areas where single-family housing is very expensive and where there is a low supply of new apartment homes. As a result, the trust's holdings are much more geographically concentrated than Equity, with about 55% of the total portfolio (about 80,000 units) located in San Francisco, New York City, or Washington DC.

UDR(NYSE:UDR) is several times smaller than either of the other two, but still owns about 46,000 apartment homes and pays a higher dividend than the other two (more on that in a bit). UDR specializes on middle-market apartment homes, and is perhaps the most geographically diverse of the three funds mentioned here.  The trust's strategy is to focus on demographic groups that have a large amount of renters, such as young professionals, blue-collar families, and older singles.

Growth and rising income is a recipe for success
In order to be classified as an REIT, the trust must distribute at least 90% of its taxable income to shareholders in the form of dividends. This produces annual yields that may not be what you would think of as "high-income", but the beauty of equity REITs is that rental income tends to increase over time, and in a fairly steady manner.

All three of these offer decent income, with annual yields of 3.5%, 3.61%, and 4.05% for Equity, AvalonBay, and UDR, respectively. However, why equity REITs can be such a great long-term investment is the combination of a growing income stream and the growth in the value of the underlying portfolio of properties (more equity), which is what can build real wealth over the long term.

If you buy a solid REIT that is well-run and diversified, low vacancy rates and rising rents can deliver excellent growth in your portfolio for years to come.

Nine more great choices for growth and income
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers