Real Estate Investment Trusts (REITs) have been around since 1960 and they have been a way for average investors to participate in the success of well-managed companies in specific real estate segments ranging from shopping centers to cell towers. Most REITs are publicly held and issue stock that is traded on stock markets like the New York Stock Exchange.
However, REITS also can be very risky. While some REITs have delivered impressive long-term gains and dividend yields ranging from 3% to almost 8% in recent years, REITs are far more volatile than bonds or CDs. Just like other stocks, REITs are no better than the company that issues them and the real estate segment where that company does business. It stands to reason that when apartment buildings thrive, so will REITS in that sector. If shopping centers are doing poorly, their REITS are probably not doing well either.
One of the biggest stories in real estate has been a fast growing class of rental homes that now number more than 14 million across the nation. Individuals and small partnerships that own fewer than ten properties owe the vast majority of single family rentals. They have been generating handsome returns on investment because they pay back investors two ways: cash flow from monthly rental payments and appreciation in the value of the property. Strong rental demand from families unable to qualify for a mortgage or afford rising home prices is keeping vacancy rates low and rental increases high. Now a handful of REITS that have sprung up in the past three years focused on trying to profit on the single family rental phenomenon.
On the face of it, investing in a REIT looks like a good way to participate in the single family rental boom without risking much, but there are some good reasons to take care. If you end up in an underperforming REIT you might kick yourself for missing a much better opportunity by investing in a specific property on terms you control.
Reality Check on REITs
Here’s what’s wrong with the REITs in the single family rental sector today:
- None of them has made a penny of profit yet. Even though some have purchased thousands of properties, those real estate assets don’t translate into profits. Their costs exceed their income. As a result, it’s almost impossible for an investor to know which will be profitable and when, and which will not.
- Not only is the single family rental sector new, all of these companies are new and the ownership and management of thousands of rental homes by a single company is new. Managing thousands of geographically dispersed rental properties profitably is much more difficult than managing units in one apartment. Good management will determine the success or failure of these companies and it is too soon to know which are good at it and which will fail.
- Property values in some of the markets where REITS have made huge investments (Atlanta, Columbus, Detroit, Los Angeles) stopped rising late last year. Along with big hedge funds, REITS dramatically reduced their acquisitions in January, as prices rose and inventories of foreclosures and short sales declined.
- Traditionally, REITs are prized for their dividend payments and REITs are required to distribute 90% or more of taxable income to shareholders, in the form of dividends, every year. Only one single family rental REIT pays much of a dividend, a paltry penny per share each quarter.
Single family REITs today are still a frontier. There are currently 203 publicly listed REITs in the U.S. and only a handful of them are in nontraditional markets like data centers, student housing, self-storage and timber. Of those, only seven are in single family rentals, the newest and least tested of all REITs.
Today there are endless unknowns: How will the surge of new apartment construction impact demand? How well are REITs picking their markets? How will the dynamics between renting and home buying affect the market? With home prices rising, how will REITs grow? With the whole nation to choose from, why are so many REITs competing with each other in markets like Phoenix, Las Vegas and Atlanta?
Investors in a single family rental REIT today can be sure of one thing: they will be paying the price for the learning experiences that management will inevitably go through in the single family rental sector.
Own Your Own Rental, Not Another’s Mistakes
Investors looking to get into the single family boom don’t need to wait for the REITs to shake out and learn their lessons, they can choose a path that has already been successful for four million small investors.
Now, investors have a new way to invest in residential real estate. HomeUnion, a full service investment company, is introducing an entirely new “hands free” way for investors to bridge the gap to real estate investing. HomeUnion operates a full service rental investment marketplace where real estate investors can select and buy Cash Flow rentals from Certified Property Providers. Properties are located in cash flow zones across the country. These rental investments, with their steady monthly income potential, can help investors who are retired, planning for retirement or wanting to diversify their portfolio. Investors save time and money, and begin their investing experience in the right location and with professional service.
For many investors, investing in real estate the HomeUnion way will be as easy as investing in the securities markets, yet much less volatile. The three ways real estate builds higher yields—leverage, cash flow and appreciated equity—have enticed Wall Street’s richest hedge fund investors to enter single family rentals. Now, the same opportunities are available to the average investor.
Best of all, the learning curve is much shorter and you don’t have to pay for another’s mistakes. You pick the property you want and work with established professionals to produce the best possible result.