Investing in Residential REITs | The Motley Fool

For investors looking for longer-term investments that are “as stable as they are,” residential REITs can offer both stability and growth. Because these stocks represent very real and profitable real estate investments, they can feel much safer than investing in growth stocks that may start out with fewer assets and more debt. Residential REITs aren’t sexy, but they represent important real estate types without which society literally cannot function.

People carry boxes up apartment stairs

Image source: Getty Images.

Understand residential REITs

There are many different types of real estate investment trusts (REITs), but residential REITs are one of the most popular types. It may be because they are familiar in a way and represent something everyone needs: a home. Residential REITs buy and hold real estate and then lease the property to tenants using gross leases. Sometimes they sell properties to add value to other properties or to make new and similar purchases, but always with the aim of improving the return on their investments.

Residential REITs can hold virtually any collection of residential rental properties, from hundreds of single-family homes to trailer parks, boutique apartment buildings, or massive multi-family complexes. Generally, REITs buy and hold properties that are too expensive for most investors to buy individually, making residential real estate accessible to many more people.

Benefits of investing in residential REITs

While REITs are a lot less exciting than, say, the latest tech stocks, they’re a very stable and durable investment that will stand the test of time. Real estate investing through residential REITs is great for anyone looking for something very reliable as a standalone investment, or those looking to balance even riskier investments. There are several good reasons to choose residential REITs:

Residential REITs tend to be recession-proof

Because everyone needs a place to live, residential REITs tend to do well even in the worst of times. Office workers don’t always need offices, and industrial space can shrink, but people always need places to live, no matter where they are or how much money they make.

The demand is increasing

The population is growing and more and more people are choosing to live alone, which is putting a lot of pressure on the rental market. These households don’t just need rents, they need more of what good residential REITs are happy to provide. When demand increases, so do rents, generating reliable income for REIT owners. Rental demand is currently exceptionally high and is forecast to continue to grow.

Fewer people are able to buy houses

Years of inventory shortages have pushed up home purchase prices and made it harder for people to buy their own home. With larger down payments and a more rigorous loan qualification process for most potential buyers, more and more people are choosing to stay longer while they work on their credit and build their savings.

Risks of Investing in Residential REITs

Although residential REITs tend to be very stable and reliable as an investment type, 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 (which is ideally the way to invest in a REIT, but is generally not a requirement to buy).

Consider the housing market

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

Overleveraged REITs can be risky

Residential REITs often have to take on significant debt when getting started or when working on a new project or major acquisition. When debt becomes an excessive financial burden, it can destabilize the business. A residential REIT shouldn’t be living paycheck to paycheck and shouldn’t be able to absorb a major financial hit, whether new or established.

An oversupply can affect occupancy and rental prices

A hot market is an enticing place for a residential REIT to give it all. It’s one thing to juggle a portfolio that’s reasonably balanced across multiple markets or multiple rental property types, but it’s quite another to have most of your money in one place. Oversupply is a REIT killer for residential real estate, particularly for those that are heavily indebted. When an apartment complex goes from 95% to 75% occupancy due to a sudden influx of competing units, this can be a big problem. To slow the bleeding, many companies will cut rents to be more competitive with other properties of the same type, and the race to the bottom begins.

Rising interest rates can create challenges

Residential REITs often carry debt. Credit allows them to upgrade properties, make new purchases, and conduct their own speculation without taking a large bite of capital. When interest rates are low, the cost of debt is almost nothing, making it easier to make upgrades that allow them to raise rents or improve the lives of their tenants. However, when debt gets expensive, all sorts of dominoes can fall. For example, if improvements cannot be used affordably, it could result in some properties falling from Class A to Class B or even from Class B to Class C, which can reduce the rent each unit brings.

3 Top Residential REITs to Buy

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

Surname

ticker

market capitalization

description

Camden Property Trust

(NYSE:CPT)

$17.23 billion

Class A and Class B apartments

Apartment Communities in Central America, Inc.

(NYSE: COUNTRY)

$25.2 billion

Class A and Class B apartments

UMH properties

(NYSE:UMH)

$1.24 billion

Manufactured case

Data Source: Yahoo! finance. Data as of January 13, 2022. Table provided by the author.

Camden Property Trust

Despite being part of a highly competitive housing market, Camden Property Trust recently reported its highest-ever occupancy rate of 97.5% and is expected to continue growing. The company is stepping up acquisitions in the US. Many of Camden Property Trust’s properties also include ground floor retail, office or mixed-use space, creating true communities where people can work, play and live. Although the past year has been about spending, it has also been about remarkable growth from a healthy, diversified portfolio.

Apartment Communities in Central America, Inc.

With a vast and diverse portfolio of nearly 300 properties, Mid-America Apartment Communities is well positioned for long-term growth. Rather than focusing primarily on building, it has enhanced its inventory by purchasing and remodeling units that appeal to a middle-income demographic. Its $14.7 million real estate fortune is encumbered with $4.5 million in debt, giving the company some room for real estate improvements as well as more money going straight into investors’ pockets instead for interest payments.

UMH properties

Though UMH has had some tough spots in its history, increased interest in single-family home ownership and rentals due to the pandemic has given it a major boost. The REIT grew its dividends by 5.5% in 2021, for the first time since 2009. UMH is the largest owner of prefab communities in the U.S., owning about 8,700 single-family homes and 3,300 vacant lots. It also owns 1,800 acres which will allow it to build approximately 7,300 additional lots. That’s plenty of room for COVID-conscious renters who’d rather not risk apartment living but can’t afford to buy a traditional home.

A more stable, hassle-free investment

Investing in residential REITs can provide the stability inherent in real estate investing, even if you’re not particularly interested in doing maintenance or dealing with tenants. Instead of doing the day-to-day running, you make your money work for you while someone else takes care of the professional property management and all the other headaches that come with being a landlord.