Back in July, I suggested that the financial situation of the so-called millennial generation was far more precarious than many thought.
Turns out, I was right.
In fact, according to Moody’s data cited in a recent Wall Street Journal article, the savings rate for adults under 35 is currently negative 2%, after having trended lower for the past several years.
That’s bad news for today’s young people… but it’s creating an opportunity that investors would be crazy to pass up.
Essentially, burdensome student loan debt and stagnant wages are driving homeownership rates lower among young adults.
As it becomes increasingly difficult to afford a house, millennials are turning to apartments and units in multi-family communities instead.
The good news is, as we quickly become a nation of renters, investors can capitalize on this trend by becoming landlords.
And as it turns out, there’s a way to effectively do this with the click of a button…
Apartment real estate investment trusts (REITs) allow us to make investments in apartment buildings and multi-family communities.
However, I don’t recommend the larger apartment REITs, such as Equity Residential (EQR). As I’ve said before, these investments are very popular with institutional investors, which has driven prices up and dividend yields down.
Fortunately, retail investors can take advantage of their small stature by targeting REITs with market caps too trivial for most institutions.
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One such REIT is Independence Realty Trust (IRT), which I covered in my July article.
Preferred Apartment Communities (APTS) is another small-cap apartment REIT that deserves a look as well.
With operations in over 20 U.S. markets, the company’s core business is a full-service, property-level management firm. It also acquires and originates senior mortgage loans, subordinate loans, or mezzanine debt secured by interests in multi-family properties.
On September 26, 2014, the company acquired four multi-family communities with an aggregate of 1,397 units in the Kansas City, Dallas, Nashville, and Houston markets. It now owns 3,326 multi-family units and holds an option, through its mezzanine loan program, to purchase an additional 3,663 units that are under development.
Not only does it have a catchy ticker, but APTS also trades at a low 9.5 times 2014 estimated funds from operations (FFO).
It also enriched its quarterly dividend payout on November 3, and now yields 8.1%.
So, like Independence Realty Trust, Preferred Apartment Communities’ valuation and yield are very attractive relative to most larger apartment REITs.
These stocks are a great way to effectively become a landlord without the hassle, all while benefiting from the downward trend in U.S. homeownership rates.
Safe (and high-yield) investing,
Alan Gula, CFA