Real Estate Investment Trusts (REITs), have become a popular choice for investors seeking long-term, steady growth and inflation-protected income. They are companies that own, operate, or finance income-producing properties. If you are looking to invest in the residential real estate market, then residential REITs can be a suitable option. In this article, we will be discussing the best residential REITs in 2023 and some alternative options available for investors.
Understanding Residential REITs
Real Estate Investment Trusts (REITs) are a popular investment option for those seeking exposure to the real estate market without owning physical property. Residential REITs primarily invest in rental properties, such as apartments, condominiums, and student housing. These trusts collect rent from their tenants and earn income by investing in real estate properties.
What are Residential REITs?
Residential REITs are a type of REIT that invests in residential properties. These properties can be single-family homes, apartments, or any other type of dwelling that is rented out to tenants. Residential REITs are managed by professional real estate managers who are responsible for the day-to-day operations of the properties, including leasing, maintenance, and repairs.
Residential REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them an attractive option for income-seeking investors. These dividends are typically paid out quarterly and can provide a steady stream of income for investors.
How do Residential REITs Work?
A residential REIT makes money by leasing out properties to tenants and collecting rent. As a shareholder, you earn money in the form of dividends paid by the REIT. The income of these trusts is generated by the rent they receive from their tenants and may include capital gains realized by the trusts when they sell properties for a profit.
Residential REITs are required to meet certain criteria to maintain their status as a REIT. For example, they must invest at least 75% of their assets in real estate, derive at least 75% of their gross income from real estate-related sources, and distribute at least 90% of their taxable income to shareholders.
Benefits of Investing in Residential REITs
Investing in residential REITs can be an excellent way to diversify your portfolio and earn regular rental income. These types of REITs are a stable investment because people will always require a place to live, so there will always be a demand for rental properties. Moreover, investing in a residential REIT eliminates the responsibilities and headaches of managing rental properties independently.
Residential REITs can also provide investors with exposure to different types of residential properties. For example, some REITs may focus on luxury apartments in high-end neighborhoods, while others may invest in affordable housing for low-income families.
Another benefit of investing in residential REITs is that they can provide investors with a hedge against inflation. As the cost of living increases, so do rental prices, which can lead to higher dividends for shareholders.
Finally, investing in residential REITs can provide investors with the potential for long-term capital appreciation. As the value of the underlying real estate holdings increases, so too does the value of the REIT. This can lead to capital gains for investors if they decide to sell their shares.
5 Residential REITs to Watch
These are the best residential REITs to invest in based on their market capitalization and quality of assets.
1. AvalonBay Communities, Inc. (AVB)
AvalonBay Communities, Inc. (AVB) is a prominent real estate investment trust (REIT) that specializes in developing, owning, and operating high-quality multifamily apartment communities. Founded in 1978, the company is headquartered in Arlington, Virginia, and has established itself as a leading player in the residential real estate sector.
AVB’s primary focus is on designing and managing apartment communities in key markets across the United States, catering to a diverse range of residents seeking well-appointed living spaces with modern amenities and desirable locations. The company’s portfolio includes a variety of apartment types, from urban high-rises to suburban garden-style apartments, reflecting its commitment to creating vibrant and sustainable living environments.
AVB’s market capitalization as of August 7th, 2023 is $26.68 billion.
2. Equity Residential (EQR)
Equity Residential (EQR) is a well-established real estate investment trust (REIT) that specializes in the acquisition, development, and management of apartment properties. Founded in 1969, the company is headquartered in Chicago, Illinois, and has built a significant presence in the residential real estate market. EQR’s core focus is on owning and operating a diverse portfolio of high-quality apartment communities primarily located in urban and densely populated suburban markets across the United States.
The company is known for offering residents a range of housing options, from luxury apartments to more affordable rental units, all designed to provide comfortable and convenient living experiences. With a commitment to sustainable practices and enhancing the communities it serves, Equity Residential remains dedicated to creating attractive living spaces that meet the evolving needs of residents.
EQR’s market capitalization as of August 7th, 2023 is $25.07 billion.
3. Essex Property Trust, Inc. (ESS)
Essex Property Trust, Inc. (ESS) is a reputable real estate investment trust (REIT) that specializes in owning, developing, and managing multifamily apartment communities. Headquartered in San Mateo, California, ESS has established itself as a significant player in the residential real estate sector. The company primarily focuses on acquiring and operating apartment properties in high-growth markets on the West Coast of the United States, particularly in regions like Northern and Southern California, Seattle, and Portland.
ESS is known for offering a wide range of apartment options, catering to diverse resident needs and preferences, from luxury living to more moderately priced rental units. With a commitment to creating vibrant and sustainable communities, Essex Property Trust aims to provide residents with high-quality living spaces, modern amenities, and convenient locations.
ESS’s market capitalization as of August 7th, 2023 is $15.75 billion.
4. Mid-America Apartment Communities, Inc. (MAA)
Mid-America Apartment Communities, Inc. (MAA) is a prominent real estate investment trust (REIT) that specializes in owning, acquiring, and managing apartment communities. Headquartered in Memphis, Tennessee, MAA focuses on providing residents with comfortable and well-maintained living spaces in attractive locations across the United States. The company’s portfolio includes a diverse range of apartment types, from garden-style apartments to mid-rise and high-rise properties, catering to various lifestyle preferences and rental needs.
MAA’s primary geographic focus is on the Southeastern and Southwestern regions of the United States, with a presence in cities and suburban areas known for economic growth and strong housing demand. MAA is committed to maintaining and enhancing the communities it serves by offering modern amenities, sustainable practices, and resident-focused services. Its strategic approach to property management and a dedication to creating appealing living environments have contributed to its reputation as a reliable player in the residential real estate market.
MAA’s market capitalization as of August 7th, 2023 is $17.74 billion.
5. UDR, Inc. (UDR)
The fifth and final residential REIT to watch is LMN Trust. LMN Trust invests in student housing properties located in college towns and cities. College towns provide a stable source of rental income as students are always in need of off-campus housing. LMN Trust has been consistent in providing stable returns to investors.
LMN Trust’s properties provide affordable and convenient housing options for college students. Their apartments are located in close proximity to college campuses and offer tenants a comfortable and convenient lifestyle. LMN Trust’s management team is committed to providing excellent customer service and maintaining high-quality living standards for their tenants.
UDR’s market capitalization as of August 7th, 2023 is $13.31 billion.
Factors to Consider When Choosing a Residential REIT
Dividend Yield and Payout Ratio
One of the most crucial factors to consider when investing in a residential REIT is the dividend yield and payout ratio. You want to ensure that the REIT is providing stable dividends and has a history of maintaining or increasing its dividends over time.
Portfolio Diversification
Another factor to consider when investing in a residential REIT is the diversification of its property portfolio. A diversified portfolio helps spread out the risk and minimizes the impact of any setbacks in a particular property or geographic location.
Management Team and Track Record
It is essential to do proper research on the management team’s track record before investing in a residential REIT. Having a competent and proven management team can help ensure the trust’s success in managing its properties and generating returns for investors.
Growth Potential and Market Trends
Finally, it is essential to consider the growth potential of a residential REIT and market trends in the real estate industry. The REIT should be well-positioned to take advantage of emerging trends in the rental housing market and have a plan to grow its portfolio and increase income over time.
Alternative Options to Residential REITs
In addition to investing in traditional residential REITs, there are several alternative options available to investors looking to diversify their real estate holdings. One such option is real estate crowdfunding platforms like Fundrise. These platforms allow investors to pool their resources with others to invest in a variety of real estate projects, ranging from residential and commercial properties to development projects. Real estate crowdfunding provides individuals with access to a broader range of real estate opportunities that may have been traditionally reserved for institutional investors. It offers a level of flexibility and control, as investors can choose specific projects or property types to invest in, potentially earning returns through rental income and property appreciation.
PRODUCT | MINIMUM INVESTMENT | ACCREDITED ONLY? | RATING | LINK |
 | $10 | No | ||
 | $100 | No | ||
 | $5,000 | No | ||
 | $25,000 | Yes | ||
 | $50,000 | Yes |
Another alternative is direct real estate ownership, where investors purchase and manage properties themselves. This could involve owning single-family homes, duplexes, or other multi-unit properties for rental income. While direct ownership requires more active involvement in property management and maintenance, it offers the potential for greater control over investment decisions and cash flow.
Additionally, investors may consider investing in real estate exchange-traded funds (ETFs) or real estate mutual funds, which provide exposure to a diversified portfolio of real estate assets, including residential and commercial properties. These funds are traded on stock exchanges and offer a more liquid investment option compared to owning physical properties.
Conclusion
Investing in residential real estate through REITs provides investors with the opportunity to earn steady rental income while diversifying their portfolio to minimize risk. With our list of the top residential REITs to watch in 2023 and the factors to consider before investing, you are equipped with the tools required to make a sound investment decision. Alternatively, if you are not comfortable investing in a residential REIT, some alternative options exist, as discussed. Finally, always do proper research, seek advice from investment professionals, and only invest what you can afford to lose.