Best Residential REITs for 2026 and How to Invest

Three top residential REITs to buy in 2026

As with all classes of REITs, there are more than a few really good choices in the residential space. Companies that have studied their markets and are prepared for hiccups make great long-term investments.

Although UMH (UMH -0.26%) has had some rough spots in its history, the increased interest in single-family ownership and rentals driven by the COVID-19 pandemic has given it a significant boost. The REIT increased dividends by 5.5% in 2021 -- the first time it raised dividends since 2009 -- and has hiked its dividend by 25% since 2020.

UMH is the largest owner of manufactured housing communities in the U.S., holding approximately 27,100 developed home sites across 11 states, and has joint interests in two communities in Florida and one in Pennsylvania. The company recently opened its own Opportunity Zone fund, as well, giving it more ways to help communities and reduce its tax burden.

How to invest in residential REITs

Here's a step-by-step guide on how to invest in residential REITs:

1. Open your brokerage app: Log in to your brokerage account where you handle your investments.
2. Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
3. Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
4. Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
5. Submit your order: Confirm the details and submit your buy order.
6. Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.

Understanding residential REITs

There are many different types of real estate investment trusts (REITs), but residential REITs are among the most popular. It may be because they're familiar, in a way, and represent something everyone needs: a home. Residential REITs buy and hold properties and rent them to tenants under gross leases. Sometimes they sell properties to upgrade others or make new, similar acquisitions, but it's always with the goal of improving the rate of return on their investments.

Residential REITs can hold virtually any collection of residential rental property, from hundreds of single-family homes to mobile home parks, boutique apartment buildings, or huge multifamily complexes. Generally, REITs buy and hold property that's too expensive for most investors to purchase individually, putting residential investment property within reach of many more people.

Advantages of investing in residential REITs

Real estate investing through residential REITs is great for anyone looking for something very dependable as a stand-alone investment or even to balance more risky investments as part of their investment strategy. There are several good reasons to choose residential REITs:

1. Residential REITs tend to be recession-proof

Because everyone needs a place to live, residential REITs tend to perform well even in the worst of times, such as a recession. Office workers might not always need offices, and industrial spaces may experience contraction, but people always need places to live, no matter where they're located or how much money they make. That's why residential REITs are often seen as a recession-proof investment.

2. The demand is increasing

The population is growing, and more people are choosing to live alone, putting significant pressure on the rental market. There are more households in need of rentals, which good residential REITs are happy to provide. As demand increases, so do rents, generating reliable income for REIT holders.

3. Fewer people are able to buy homes

Years of inventory shortages have driven home purchase prices through the roof, making it harder for people to buy their own place. Because of larger down payments and a tougher loan qualification process for most potential buyers, more people are choosing to rent for longer periods as they work on their credit and build up their savings.

Risks of investing in residential REITs

Although residential REITs tend to be very stable and dependable, individual REITs are far from guaranteed winners. There are still plenty of risks to be aware of, especially if you're looking to hold for the long term.

1. Consider the housing market

There's always a chance that a hot housing market today will be cold tomorrow. Economic factors such as the collapse of a large local employer can quickly change the profile of workers who rent from a residential REIT. When choosing a residential REIT, look for properties that have room to move if local incomes shrink or housing values fall.

2. Over-leveraged REITs can be risky

Residential REITs often have to take on considerable debt at the outset or when working on a new project or a large acquisition. If the debt creates an excessive financial burden, it can destabilize the business. A residential REIT shouldn't be essentially living paycheck to paycheck and unable to absorb a major financial blow, whether it's new or well-established.

3. Oversupply can hurt occupancy and rent rates

In a hot market, it's tempting for a residential REIT to go all out. It's one thing to juggle a portfolio that's reasonably balanced between several markets or several types of rental property, but it's quite another to put most of your money in one place. Oversupply is a residential REIT killer, especially for those that are over-leveraged.

4. Climbing interest rates can create challenges

Residential REITs often carry debt. Loans allow them to upgrade properties, make new acquisitions, and speculate without taking a big bite out of capital funds. When interest rates are low, the cost of debt is almost zero, so it's easier to make upgrades that allow them to raise rents or improve tenants' lives.

When debt gets costly, however, all kinds of dominoes may start to fall. For example, not being able to affordably leverage improvements could mean some properties fall from Class A to Class B, or even from Class B to Class C, which may decrease the rent each unit brings in.

Categories of residential REITs

All residential REITs specialize in providing housing, but there are differences. Here are the main types of specialties in residential REITs you may encounter:

Apartments. These REITs buy, sell, maintain, and lease apartments, usually in large communities. Some specialize in new-construction apartments with many high-end amenities, while others rehab older apartments to provide more affordable housing.

Student housing. Student housing REITs own both dorms and apartments, often set up with separate leases for each student tenant. They may lease just for the academic year or year-round.

Manufactured homes. Manufactured home REITs own and operate parks where manufactured homes can be legally placed, then charge rent for the home, the lot on which it sits, or both. Owners of manufactured homes can rent just the plot of land on which their units sit.

Single-family homes. Single-family home REITs own individual homes, often in clusters, or designed as built-to-rent (BTR) units. These BTR units were never intended for the homebuyer market and are often titled as a group. They provide additional amenities, much like apartment complexes, within their communities.

Key metrics to evaluate residential REITs

There are many different key metrics that you can use to evaluate residential REITs and to compare them to one another. Metrics like funds from operations (FFO)/share can tell you more about the cash flow from each REIT in a way you can compare easily across companies. Occupancy rates are important for measuring a REIT's overall demand and its long-term growth trajectory. The debt-to-equity ratio helps you see whether a company is overleveraged, and the dividend yield can help you decide whether it's time to invest or if you'd rather choose a company with a higher or lower dividend yield.

A more stable, hands-off investment

Investing in residential REITs can offer the stability of real estate investing, especially if you're not particularly interested in maintenance or tenant management. Instead of doing the daily hands-on, you're letting your money work for you while someone else handles professional property management and all the other headaches associated with being a landlord.

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