Location, location, location -- that's what any successful real estate agent will tell you matters most when it comes down to where an individual buyer will choose. But when it comes to real estate investing -- a long-established way of building real wealth -- it can help to focus on the big picture, too. In this case, the big picture involves a location trend related to more people moving away from increasingly expensive large cities to somewhat smaller metro areas that offer a lower cost of living, strong job markets, and a quality of life that appeals to young professionals and families alike.
The pandemic helped accelerate this trend, of course. The U.S. Census Bureau said in a May 2022 report that of the 15 fastest-growing metros in the U.S., eight were in the West, primarily Arizona and Texas. Seven were in the South, including such hotspots as Atlanta, Nashville, and Florida's big markets.
Sunbelt-focused portfolios that produce passive income
We're talking the Sunbelt here, of course, and a great way for retail investors to get involved is by buying shares of real estate investment trusts (REITs) that own large portfolios of apartments in these metro areas.
REITs can be a great source of passive income (their tax structures require them to distribute at least 90% of their taxable income as dividends) and capital appreciation, thus allowing you to share in the real estate profits without the pain of direct real estate management. REITs also offer liquidity in the public markets. Buy when you want, sell when you want. There's also transparency to consider. You can find out what they own and where they own it by checking out the investor relations sections on REITs' websites.
Numerous REITs either exclusively own apartment buildings or include them in diversified portfolios. Two of the best-known names that have a big focus on Sunbelt markets are Camden Property Trust (CPT -1.44%) and Mid-America Apartment Communities (MAA -1.24%), which own about 59,000 and 102,000 units, respectively.
Another interesting REIT along those lines is Independence Realty Trust (IRT -1.43%), which focuses its 35,000-unit portfolio on what it calls "non-gateway U.S. markets," including Atlanta, Louisville, Memphis, Oklahoma City, and Raleigh-Durham.
Here's how these three REITs have performed in total return (which takes into account both share price and dividends) over the past 10 years, using two exchange-traded funds -- the Vanguard Real Estate ETF and the Vanguard S&P 500 ETF, as benchmarks for the sector and the greater market, respectively.
IRT Total Return Level data by YCharts
It's worth noting that while Camden is lagging the greater market, its current dividend yield of about 3.5% is roughly twice the S&P 500's average. The other two REITs are in that ballpark, too, at 3.45% for Mid-American and 3.36% for Independence.
Then there's the pricing. Wall Street feeds on growth; after record-setting jumps in apartment rental rates nationwide during the pandemic, that's begun to slow. That and rising interest rates have had an outsized effect on the prices for REITs, which don't typically retain a lot of cash and generally have to finance their growth by borrowing or issuing stock.
You can see that effect here, with prices on each of these REITs and Vanguard Real Estate ETF -- which typically holds about 160 REITs -- lagging the greater market.
A recession-resistant business for any cycle
People need a place to live, so owning apartments, just like grocery stores, tends to be a recession-resistant business and can weather both business cycles and deeper, systemic changes -- such as what appears to be a noticeable and persistent move toward remote work for millions of Americans. In that regard, real estate dividend investors might expect more stability and growth from residential REITs than office REITs.
Along with moves to the Sunbelt, there are demographic changes, such as baby boomers downsizing and a large number of Gen Z moving out on their own while high interest rates make home buying even more expensive than ever.
Well-managed REITs follow those trends and capitalize on them, and you can too.