Another Way to Play the Rent vs. Buy Market
May 16th 2012 3:15PM
Updated May 16th 2012 3:52PM
The housing market is improving, albeit slowly, and in fits and starts. Mortgage interest rates are the lowest they've been in decades, and despite recent reports that in some areas it is often cheaper to buy your own home, many people are opting to rent.
A Gallup poll on homeownership released last month shows that homeownership is at decade-low levels -- 62% today compared with the next-lowest point, 67%, in 2001. Many reasons are given for this lack of participation in the "American dream," among them the foreclosure crisis that has created a difficult environment in which to obtain mortgages, high unemployment during the recession, and declining home values.
These days, many either can't afford a home, or simply do not believe that owning a home is a good investment, since declining home values seem to indicate that the old saw that says that a house always appreciates in value is no longer true. Just about a year ago, a Fannie Mae survey showed that the lowest percentage ever recorded -- 64% -- thought that owning a house is a safe investment. This belief seems to be rubbing off on the millennial generation, who show the least interest of any previous generation in homeownership.
Of course, declining home prices and rising rents are great news for real estate investors. But being a landlord isn't easy, with all those pesky sweat-equity issues and the constant need to find, and then keep, tenants. Don't despair, though -- there's another way to play this game and come out a winner.
Multifamily REITs can be the best of both worlds
Real estate investment trusts that specialize in multifamily apartment developments can be a sweet deal for the laid-back real estate investor. Not only do they take care of all the drudgery associated with renting homes, but are also required by law to return 90% of profits to investors. Here are three that look especially juicy.
Post Properties (NYS: PPS) just turned in its first-quarter report, handily beating estimates on FFO. This company owns and operates upscale apartment communities in desirable areas such as Atlanta, Dallas, and Washington, D.C. In a little over two years, this REIT has added nearly 1,800 new units to its portfolio, with interests in 58 apartment communities. Currently, it is building a new complex in Houston and expects to start renting sometime next summer.
Colonial Properties (NYS: CLP) continues to show escalating revenue, this time of nearly 13% from the year prior. The company is expanding, too, having recently bought a 350-unit community in Raleigh, N.C., and developing another, comparably sized community in Charlotte.
Last but not least is UDR (NYS: UDR) . This multifamily REIT is currently raising capital through strategic sales to fund its ambitious development projects for this year. Among its new initiatives is a foray into the Manhattan real estate market, where rents are going through the roof because of tight rental supply, and the scuttlebutt is that landlords there can count on rents to increase nearly 7% this year.
While there's no doubt that multifamily REITs are a growth industry, they can also be a pricey investment. They command a premium investment dollar for what they return, which will necessarily fluctuate with the housing market. All three trade at substantial multiples of EBITDA, and only Post is profitable post-interest and taxes. Colonial, however, has the most reasonable price-to-book multiple, at 1.6 times.
So do your due diligence, and keep an eye on the housing market. You just might come around to taking a second look. Continue working on your retirement plan by checking out The Motley Fool's free report on other smart investments here.
At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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