Over the past year, one of the hottest asset classes has been residential real estate. Whether you use the Clear Capital Home Data Index, the FHFA Home Price Index, or Case-Shiller, we have seen home price appreciation in the high teens as a regular feature since the beginning of the pandemic.

Stocks have struggled, and bonds are on track to have the worst year since the early 1970s. Given that real estate investing can be difficult for small investors, how can someone with a few thousand dollars get exposure to the residential real estate market? 

Picture of a house for rent.

Image source: Getty Images.

American Homes 4 Rent is consolidating a historically fragmented market

American Homes 4 Rent (AMH -1.50%) is a real estate investment trust (REIT) that focuses on buying and renting out single-family residential properties. Historically, single-family home rentals were dominated by small "mom and pop" investors who might collect rent on a duplex to fund retirement. Now we are seeing more professional, institutional money getting into the space.

American Homes 4 Rent looks for properties with several characteristics: built after 2000, three or more bedrooms, two or more baths, and a price between $250,000 and $550,000. The company believes the key to running a scalable rental business is to balance centralization and decentralization. Centralization helps the company reap the benefits of economies of scale, while decentralization helps with diversification. 

American Homes 4 Rent is in the hottest real estate markets

As a general rule, rents tend to follow home prices, and in many of American Homes 4 Rent's markets, we are seeing rapid home price appreciation. The company's biggest markets include Atlanta, Dallas-Fort Worth, Charlotte, and Phoenix. According to the Clear Capital Home Data Index, these metropolitan statistical areas (MSAs) were all in the top 15 in terms of home price appreciation last month, and each of these areas saw at least 28% annual home price appreciation. Given the rapid home price appreciation since the beginning of the year, American Homes 4 Rent should see accelerating rental inflation as the leases reset to market rates. 

Rents are increasing at nearly double-digit rates

On the earnings conference call, Chief Operating Officer Bryan Smith gave an update on the company's rent increases. New leases (e.g., a new tenant replacing an old tenant) saw 14.2% increases in rent, while renewals increased by 7.4%. This works out to a blended increase of 9.3%. In July, new leases rose by 13.2%, and renewals rose by 8.1%. The blended rate came out to 9.7%, which is an increase from the second quarter. 

Book value doesn't tell the whole story

American Homes 4 Rent has hidden value as well because its properties are carried on the balance sheet at cost less depreciation. Those properties were bought, on average, in 2015 and have appreciated since. In other words, the book value of the company way understates the liquidation value of American Homes 4 Rent. In addition, the vast majority of its debt is fixed-rate, meaning that rents are rising at a much faster rate than the interest it is paying. 

American Homes 4 Rent is guiding for funds from operations (FFO) to come in at $1.56 per share. Funds from operations is how REITs generally measure income since it adds back non-cash charges like depreciation and amortization. This puts the company on a multiple of 24 times 2022 FFO per share. This is a reasonable multiple for a market leader, especially when FFO is growing in the mid-teens. American Homes 4 Rent has some hidden value and is one of the first movers in the single-family rental space. As long as real estate prices continue to accelerate, so will American Homes 4 Rent's earnings.