Real estate has minted its share of millionaires over the years. Property values and rental rates have historically risen faster than inflation, enabling many real estate investments to enrich their investors.
One of the great things about real estate investing is that anyone can do it. You don't need much money or experience to get started. That's because Congress opened the doors to wealth-creating real estate to everyone in 1960 when it created real estate investment trusts (REITs). These entities own income-producing real estate.
REITs have been wealth-creating machines over the years. According to the data, REITs have outperformed stocks over the long term, delivering an 11.9% average annual return from 1972 to 2021 (compared to 10.7% for the S&P 500). At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years.
If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster. Here's a closer look at three wealth-creating REITs that could help make you a future millionaire.
Living up to its name
Realty Income (NYSE: O) has enriched its investors over the years. The REIT has delivered a 13.4% compound annual return since its public market listing in 1994. A big driver has been its attractive and steadily growing dividend. Realty Income has increased its monthly dividend 122 times since going public, increasing the payout at a 4.3% compound annual rate.
Realty Income has grown into one of the largest REITs over the years by steadily acquiring income-producing properties (primarily stand-alone retail, industrial, and gaming properties) and merging with other REITs. It recently agreed to buy rival REIT Spirit Realty in a $9.3 billion deal, which will make it the fourth-largest REIT.
Despite its large size, Realty Income has a massive growth runway ahead. Corporations across the U.S. and Europe currently hold $12 trillion of commercial real estate. Many of these companies would be better off completing sale-leaseback transactions with a REIT to free up that capital to expand their core business operations.
In addition to buying existing properties, there are lots of opportunities for new development. For example, the company recently made its first investment in the data center sector, which is a $1 trillion opportunity over the next decade.
Realty Income believes it can grow its earnings per share by 4% to 5% annually over the long term. Add in its dividend (currently yielding around 5.7%), and it could produce 10% to 11% annual total returns over the long haul.
Going off the beaten path for real estate riches
Equity Lifestyle Properties (NYSE: ELS) has delivered a 16% annualized total return over the last 10 years. Meanwhile, its total return since its initial public offering (IPO) in 1993 has been a staggering 6,630%. That has run circles around the S&P 500, which delivered a 1,620% total return during that period.
Equity Lifestyle has grown from 41 properties (manufactured home communities, RV parks, and marinas) at its IPO to 449 today. The company's growing portfolio has helped expand its income. Meanwhile, the earnings across its legacy properties have increased at an above-average rate over the years because there's not a lot of competition in its markets.
Those factors have driven above-average earnings and dividend growth. Since 2006, Equity Lifestyle has grown its normalized funds from operations (FFO) at a 9% compound annual rate while growing its dividend at a brisk 21% compound annual rate.
The REIT should be able to continue growing at an above-average pace in the future. Demand for space across its properties remains robust, while new supply growth is limited, which should continue powering healthy same-store income growth. In addition, Equity Lifestyle should be able to continue acquiring properties as smaller operators opt to sell to a larger player.
A fast-growing real estate behemoth
Prologis (NYSE: PLD) is one of the largest REITs and the undisputed leader among industrial REITs. Despite its massive size, it has delivered above-average growth over the years. It has grown its core FFO and dividends per share at a 12% compound annual rate over the last five years, easily surpassing the REIT sector average and the S&P 500's growth rate. That has enabled it to generate a strong total return of 14.5% annually over the last 10 years.
Prologis is in an excellent position to continue growing briskly. The company expects to deliver 8% to 10% annual net operating income growth from its existing portfolio over the next several years as legacy leases expire and it signs new leases at higher market rates.
Meanwhile, the company has enough land to build an additional $38 billion of logistics properties over the coming years. It also has lots of financial flexibility to make value-enhancing acquisitions. It bought rival Duke Realty for $23 billion last year and purchased a $3.1 billion portfolio of warehouse properties this year.
This trio of growth drivers should enable Prologis to continue increasing its 3.1%-yielding dividend at a healthy pace. Add it up, and the company should be able to produce strong total returns in the coming years.
REITs have been wealth-creating machines over the years. Realty Income, Equity Lifestyle, and Prologis have all outperformed the S&P 500 over the long term. These well-built REITs should continue enriching their investors in the future. They have the potential to turn long-term, consistent investors into millionaires.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.