Investing in a rental property can be a great way to generate some passive income. However, there are pitfalls to buying a rental property. The cost of purchasing a property and making it rental ready can be out of reach for many beginning investors. Meanwhile, owning a rental property isn't as passive as it might seem. Dealing with delinquent tenants and unexpected repairs can turn a rental property from a money maker into a money pit.
A better option for beginners is to invest in a real estate investment trust (REIT). These professionally managed entities typically own a portfolio of income-producing rental properties. They pay their investors dividends, enabling them to enjoy truly passive income from real estate. Many REITs have relatively low share prices, making them very accessible for beginning investors. Camden Property Trust (CPT 1.29%) is a great option for those just starting out. Shares of the REIT only cost about $112.
A leading landlord
Camden Property Trust is a residential REIT with a diversified rental housing portfolio:
Image source: Camden Property Trust.
As that slide shows, the company owns interests in 172 communities across 15 major markets, primarily in the fast-growing Sun Belt region. Major cities in this part of the country are benefiting from strong migration trends. Companies are expanding or relocating to the Sun Belt, bringing more jobs to the region, helping drive population growth. That growing population needs a place to live, driving demand for housing. With limited housing availability, apartment occupancy levels are high, driving strong rent growth for landlords.
These dynamics enable Camden property to generate stable and growing rental income. The REIT expects to produce about $6.86 per share of core funds from operations (FFO) this year, which is cash flow it could distribute to investors via dividends.
The REIT currently pays investors $1.00 per share in quarterly dividends ($4.00 annually). That works out to a 3.6% dividend yield at the recent price of around $112 per share. While a potential rental property investment might offer a higher income yield, the cash flow would also likely fluctuate and might be negative if there's an extended vacancy or major repair. Meanwhile, Camden's dividend is passive income investors can bank on receiving each quarter. The REIT has a low dividend payout ratio (58% of its core FFO), which gives it a big cushion.
NYSE: CPT
Key Data Points
A growing income stream
Camden's low dividend payout ratio enables it to retain some cash for reinvestment. The company has a long history of making value-enhancing investments, including redeveloping/repositioning/repurposing existing properties to boost their income, developing new communities, and acquiring additional properties.
The company has renovated over 40,000 apartment homes since its inception. It will update kitchens and baths and install new appliances, flooring, fixtures, and lighting. It spends an average of $15,000 per home, historically allowing it to boost monthly rents by $131. It expects to invest about $100 million to upgrade existing apartments this year. It will also invest money to enhance common areas and convert underutilized space into additional apartment units or new amenities to increase income and tenant appeal.
Camden also invests money to build new rental communities. It's currently spending $661 million to build an additional 1,950 units across six new communities, including its first two single-family rental developments in Texas. The REIT has the land to build another 3,352 units across nine communities in the future, which would cost an estimated $1.4 billion.
The REIT will also acquire communities as accretive opportunities arise. It typically seeks to buy recently built communities since they require less ongoing maintenance spending.
These growth-focused investments and rent growth increase the REIT's core FFO per share. That enables it to steadily increase its dividend. Camden increased its payout by 6.4% earlier this year. It has grown its dividend by nearly 140% from its initial annualized level following its public offering in 1993.
Meanwhile, the dividend income is only part of the return. Camden's steadily rising earnings help drive stock price appreciation. The REIT has generated an 11.2% average annual total return since 1993. That has grown a $100 investment into nearly $2,400.
An easy way to earn real estate passive income
Camden Property Trust is a much easier and lower-cost way of making passive income from real estate than buying a rental property. The REIT pays truly passive income that its investors can bank on each quarter. Meanwhile, its reasonably low share price makes it very accessible to beginning investors.
