Due to the slowdown in the housing market, many real estate investment trust shareholders have shied away from residential REITs, moving their investments into retail and other commercial REITs instead. However, the current millennial housing trend towards renting instead of home buying can actually make apartment REITs an attractive investment. We’re seeing a positive trend for apartment and single-family home REITs as more young adults and families move out of their parent’s homes and into apartments in urban centers or small homes in the surrounding suburbs. Below we explore the evolution of this housing trend and how you can make it work for you.
Renting Instead of Owning
There are a variety of factors that have contributed to the current generation of young adults often choosing to rent their homes. Part of it can be attributed to the rising cost of living compared to the relatively unchanged income over the past few decades, as well as the hurdles of qualifying for a mortgage in the post-housing bubble market. Regardless of all the contributing factors, what we know for sure is that the younger generations are forgoing purchasing their first homes until much later in life.
In fact, the data shows that home ownership has been steadily declining over the past few generations. While around 50% of people born between 1971-1980 owned a home by the age of 30, only 34% of households born between 1980-1990 are homeowners. In 2018, only 0.8% even made their first home purchase, down from 1.5% in 2003. While the trend seems to be that the percentage of homeowners in a generation rises with age, we’re still seeing a significant reduction in homeownership in the younger generations than in previous ones.
The Value of Residential REITs
As more people look for affordable apartments and homes to rent in urban and suburban areas, the cost of rent continues to increase due to demand shortages. This, of course, presents a great opportunity for investors. As the demand for affordable rentals goes up, so too does the cost of rent and with it the dividends and return on investment for shareholders of residential REITs. Apartment REITs are especially appealing, as the majority of millennials moving out on their own are looking for available housing near their jobs in the city centers. Single-family REITs are also a good investment option, as these same young adults are looking for small suburban homes to move into once they’re ready to start a family.
While it’s expected that millennials will eventually catch up with previous generations in terms of homeownership, for now, the market isn’t there yet, making residential REIT investments a great opportunity for most people.