The pleasure of passive income is no secret: a stream of steady cash coming in each month or quarter through no more effort than committing some cash to the asset that generates it.
It's also no secret that real estate is a great place to invest for passive income. The market itself has been anything but passive, though, especially in residential real estate, the sector that perhaps most lends itself to the non-institutional, individual investor.
Rising prices and rents have made it tough to find bargains, but there are still some to be had. A good place to look is real estate investment trusts (REITs) that specialize in residential properties. Here are two to consider: Essex Property Trust (ESS +0.12%) and Invitation Homes (NYSE: INVH).
Here's a look at why these two have the inflation-fighting ability to raise rent quickly (because leases are typically short), and long records of investor payback that show their inclination to keep raising dividends.
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1. Essex Property Trust
Essex Property Trust is a Dividend Aristocrat. After 28 straight years of annual dividend increases, it is now yielding about 3.1% with a share price that's down about 18% year to date. And it has a long record of reliable shareholder rewards.
Since going public in 1994 with 16 apartment communities, Essex has grown its portfolio to 248 properties, including 85 in and around San Francisco, 59 in and around Seattle, and the rest in and around Los Angeles and San Diego. A $10,000 investment made at its initial public offering would now be worth a cool $148,260, giving it what the company calls "one of the highest total returns of all public U.S. REITs" in that time.
NYSE: ESS
Key Data Points
Essex is not resting on its laurels. The company plans to spend $500 million to $700 million for new properties in 2022, while selling $100 million to $300 million in current holdings. Funds from operations (FFO) -- a key measure of a REIT's financial performance -- are now projected to come in at $13.77 to $14.13 per share after finishing 2021 at $12.49. That would value shares of Essex at a price to FFO per share of 20.6 times at the midpoint, a rather reasonable valuation for a REIT growing at this pace.
2. Invitation Homes
Invitation Homes (INVH +1.22%) is a giant in the single-family rental business, with a portfolio of 85,582 homes as of May 12. Nearly all its properties are close to major employment centers, good schools, and transportation corridors in the West, Southeast, Texas, and Florida.
The company says resident turnover is at its lowest ever, with the average tenure at nearly 32 months. Its portfolio is more than 98% occupied by a renter base with an average annual income for new residents of nearly $130,000.
NYSE: INVH
Key Data Points
Invitation Homes also has $1.5 billion in liquidity and has another $1.5 billion tied up in new joint homebuying ventures and expects to buy about 7,500 new homes from the PulteGroup over the next five years. That's in addition to the nearly 2,000 it has under contract with multiple builders for delivery next year and beyond.
The stock is down about 19% so far this year and is now yielding about 2.39% after raising its dividend every year since going public in 2017, including by nearly 16% in the past three years.
Invitation Homes reported FFO growth of about 11% year-over-year in 1Q22 and its guidance calls for FFO of $1.62 to $1.70 per share for 2022, giving it a price to FFO per share ratio of about 22.1% at the midpoint. With same-store revenue growth guided to grow 8% to 9% during the year, like Essex, Invitation also looks like a sustainable source of passive income for buy-and-hold investors.
Striking while the iron's hot (and the market's not)
Each of these residential REITs is in a fairly recession-proof business (people have to live somewhere) and operate in markets where they've been able to fine-tune their business models over time.
That and their balance sheet strength and proven inclination to raise their payouts as well as their rents make them good considerations to buy now -- especially given their currently depressed share prices -- and to keep holding for a good long while, too, especially if you're interested in making money from real estate, not competing to buy it.
