Housing stocks have always been an essential part of a well-diversified portfolio, and recent trends confirm that the rental housing market is heating up faster than single-family homes. But let’s face it: Few of us have the stomach for midnight maintenance calls and rowdy tenants, so thankfully there’s another way to play this market: stocks, real estate investment trusts (REITs) and exchange traded funds (ETFs) that focus on the rental market.
The trends are compelling: Construction of rental housing showed positive growth in the first quarter of 2014, according to the National Association of Home Builders’ new Multifamily Production Index (MPI) released last week. The index increased three points to 53, which is the ninth consecutive quarter with a reading of 50 or above.
That’s in line with recent federal government data showing that multifamily rental housing starts rose a whopping 39.6% in April, while single-family housing starts inched up 0.8%. In short, while the housing market is recovering, tight credit and a volatile job market are motivating more people to rent rather than buy.
So what does that mean for investors? If you’re looking to cash in on the rental housing boom, look for housing stocks that directly benefits from the trend. Another option: real estate investment trusts (REITs), which are exempt from corporate taxes and are required to pay out 90% of their annual earnings to investors. REITs tend to have extremely attractive dividend yields — great news for income investors. The steady rent payments also tend to deliver more stable cash flows.
The easiest ways to play the market are with multifamily residential construction stocks, multifamily-focused mortgage REITs (mREITs), which invest in residential mortgages; and exchange-traded funds (ETFs) that hold shares in multiple REITs and trade over an exchange like stocks.
Here’s your best bet for each investment type: