Investors and analysts have tried to call the
bottom in the housing market
for years. Instead of trying to guess when home prices might stop
falling, some investors have turned elsewhere to look for gains --
and they're finding them in the red-hot market for residential
Going with the flow
Just five years ago, the
key to success in real estate investing
was simple: Buy just about any residential property, wait anywhere
from a month to a year, and then sell it at a huge profit. After
all, since the turn of the millennium, similar investors had made
boatloads of money flipping houses, and investors were seduced by
the idea that even during past real estate busts, overall housing
prices hadn't actually
in price substantially.
Of course, we all know the aftermath of the housing bust, as
that long-held real estate wisdom fell prey to harsh reality.
Millions of homeowners have lost their homes
, and millions more are underwater on their mortgages. Shareholders
of companies related at all to housing, from homebuilders and banks
, have suffered greatly. It's tempting to think that after such a
huge drop in prices, the housing market must offer great
But rather than trying to decide whether single-family homes are
a great value or merely a value trap, look instead at these
- Apartment rents have risen 6% since 2006 and are expected to
rise another 3% this year.
- Vacancy rates for apartments have fallen from 8% just a year
ago to 6.2% today.
- Millions of displaced former homeowners have no choice but to
At the same time,
low interest rates
have made it easier for prospective real estate investors to buy
rental properties and have reduced carrying costs. Combined with
higher rents, that adds to the profit potential of rental
How to cash in
Plenty of real estate investors make a small business of their
rental properties. But you shouldn't look at rentals as free money.
Investors earn a lot of their profits through hard work, going
through the often difficult process of finding creditworthy
tenants, dealing with repair requests and other problems that
demand immediate attention, and juggling the ongoing maintenance
needs that any property owner has to handle. And while you can pay
a property management company to take care of some of those jobs,
doing so adds to your overhead, reducing your potential
If you don't want to deal with individual properties, you can
find easier ways to invest. The obvious first place to look is at
real estate investment trusts that focus on apartments and other
rental real estate. Let's look at a few of the biggest options in
- Some REITs have national scope.
) , for instance, has properties in 24 states.
Apartment Investment & Management
) have a similarly wide area of operation.
- Other REITs have a more geographically focused approach.
) rents almost 24,000 units on the West Coast and in Arizona and
) operates 125 communities on the East Coast.
- Some rental REITs have a more specialized focus. You can find
plenty of REITs that include senior housing, such as health-care
(VTR) . On the other hand,
American Campus Communities
(ACC) targets the other end of the age spectrum, building and
operating student housing facilities as well as providing
management services for colleges and universities that own their
When you look at the returns of these stocks over the past two
years, you won't see the losses that homebuilders have sported.
Rather, their shares are reflecting the favorable fundamentals of
the rental industry. Yet as REITs, these companies provide
significant dividends to investors -- returns that any real estate
investor can appreciate.
Wave of the future?
Some have argued that the American dream of homeownership is dead.
Rather than mourning that fact, though, you might do better for
yourself by investing in the countertrend of rental housing. With
conditions favoring renting, it's possible that you'll find more
gains either in rental REITs or from rental properties you find on
REITs are just one way that investors can profit from dividends.
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will never be a real estate tycoon. He doesn't own shares of
the companies mentioned in this article.
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