Many Americans believe that due to the current economy, the price of real estate and the difficult credit environment, the dream of owning a home is no longer a sensible option. Indeed, a fair number of people who were previously buyers are still walking away from real estate purchases made within the past decade. If these people aren’t able buy a place to call their own, they are probably going to rent one (or move in with a relative).
As a result, several investors have concluded that rental properties, especially if cash-flow positive, are a sensible investment. Additionally, rent tends to go up with inflation, so rental properties are a potential option to prepare for the any inflation you may anticipate coming in the next few years.
Residential REITs usually pay above-average dividends when compared to the broader U.S. equity market, and when rents go up due to inflation and lease escalation, so should the dividends. Many trustees also believe that some real estate exposure is necessary to maintain a prudently allocated portfolio of assets, and that REIT allocations can help generate income.
American Campus Communities Inc. (ACC)
- Current Yield: 3.6%
- 1-month performance: -1.13%
- 2011-to-date performance: 17%
Apartment Investment & Management Co. (AIV)
- Current Yield: 1.8%
- 1-month performance: -11.67%
- 2011-to-date performance: -5.21%
Colonial Properties Trust (CLP)
- Current Yield: 2.9%
- 1-month performance: -7.95%
- 2011-to-date performance: 9.64%
Education Realty Trust Inc. (EDR)
- Current Yield: 3.3%
- 1-month performance: -9.38%
- 2011-to-date performance: 6.95%
Equity LifeStyle Properties, Inc. (ELS)
- Current Yield: 2.3%
- 1-month performance: -5.34%
- 2011-to-date performance: 14.68%
Home Properties Inc. (HME)
- Current Yield: 3.8%
- 1-month performance: -4.79%
- 2011-to-date performance: 13.27%
Post Properties Inc. (PPS)
- Current Yield: 2.1%
- 1-month performance: -8.92%
- 2011-to-date performance: 8.90%
This group has not only outperformed the broader equity market during this recent sell-off, but also throughout 2011 so far. In fact, as the 2011-to-date chart (below, click to enlarge) shows, six of these seven residential REITs are still positive for 2011.
Generally, rental units in locations less concerned with unemployment are probably going to do better than those where unemployment is high. Locations such as Washington D.C., New York, and certain areas in Texas, among others, are well known for maintaining high employment rates. D.C., of course, has a significant level of government employment, which is generally secure and growing in volume. Student housing usually has a strong market, but in economic downturns students may choose to stay home, or their parents may choose that for them.
REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, REIT dividends are taxed as ordinary income, and not at the lower corporate dividend rate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.