The United States is faced with an unprecedented housing conundrum. Currently, home prices are at historic lows, as are interest rates. This would usually result in potential home buyers flooding the market for a great deal, and there are surely a few of those out there, but the majority of people in the home market are sticking to rentals.
This shift in the market has influenced the way real estate investments are made. Real Estate Investment Trusts, or REITs, invest in and operate income-generating real estate. The hot trend in REIT investment today is, unsurprisingly, apartment buildings.
The main reason apartment investments are on such an upswing right now is “simple supply and demand economics,” said David White, president and founder of investment, tax and financial planning firm David B. White Financial in Michigan.
“The demand is going up sharply, especially from young people leaving school who were otherwise supposed to be flooding the buyers market. On top of that, supply is decreasing because they’re not building apartments at the same pace demand is increasing,” said White.
This combination is what is causing such a buzz from the REIT investment world. Another reason, White said, is that home prices continue to decline on a national level. Homebuyers are extremely skeptical of making an investment that could decline in value.
The steady stream of income that is generated by owning rental property is another eye-catching characteristic for investors. Monthly rent, though not guaranteed, of course, is appealing to investors who have been scared off by the nation’s deep foreclosure crisis.
Here are three REITs with 2-3 star ratings from Morningstar Inc.:
— UDR Inc. (UDR)
2 stars from Morningstar
52-week range (March 16, 2011 – March 16, 2012): 20.04-27.26
Year-to-date growth: 2.2%
— Equity Residential (EQR)
2 stars from Morningstar
52-week range (March 16, 2011-March 16, 2012): 48.46-63.86
Year-to-date growth: 5.2%
— Apartment Investment & Management (AIV)
3 stars from Morningstar
52-week range (March 16, 2011-March 16, 2012): 20.08-28.12
Year-to-date growth: 11%
White does warn of certain risks associated with investing in apartment complexes through REITs. The main risk, he said, is that the apartment complexes themselves lose value when tenants move out or the buildings cannot fulfill occupancy. When this happens, REITs are forced to cut or eliminate dividends to balance their costs.
Risks aside, the appeal of investing in apartment complexes is undeniable to those working with REITs. During a time when banks are being forced to sell off their “crown jewel” properties, the apartment sector and REITs are shining lights in an otherwise grim housing market.