As more Americans rely on renting a home, real estate investment trusts and sector-related exchange traded fund that focus on residential areas could continue to offer investors attractive returns.
A growing number of high-earning Americans are renting instead of buying homes, the Wall Street Journal reports. In 2019, about 19% of U.S. households with six-figure incomes rented a home, compared to about 12% in 2006, marking an increase of about about 3.4 million new renters who would have likely been homeowners a generation ago.
“I can’t think of anyone we’ve rented to recently who didn’t make $100,000,” Bruce McNeilage, who owns 148 rental homes around the Southeast and is building 118 more, told the WSJ.
Looking ahead, big home-rental companies are hoping that high-income Americans will continue renting. Companies backed by financiers like Blackstone Group Inc., Starwood Capital Group and Colony Capital Inc., have been buying up foreclosed houses with the expectation of renting them to well-off workers whom are able to afford the higher rents.
“Very early in this business, we figured out that the cost to replace the HVAC unit is, for the most part, the same on a $1,200 or $1,300 rental as it is on $1,800 or $1,900 rental,” Dallas Tanner, chief executive and a founder of Invitation Homes, told the WSJ.
Despite a growing economy and low unemployment, homeownership rate remains about a percentage point below the long-term average of 65% and below the peak of 69% in the last housing bubble. Census Bureau data showed there were 78.5 million owner-occupied housing units compared to 43.9 million that were rented over the second quarter.
Investors who do want a piece of the real estate action can still do so through funds like the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. However, broad REITs sector-specific ETFs have low exposure to residential REITs, with VNQ’s underlying portfolio including a 14.9% tilt to residentials.
On the other hand, ETF investors who are interested in gaining exposure to this ongoing trend in the housing market can consider residential REITs-related ETFs, such as the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) and NuShares Short-Term REIT ETF (BATS: NURE). NURE includes a hefty 48.5% tilt toward apartment or rental-related REITs while REZ has a 49.9% weight in residential REITs.
For more information on real estate investment trusts, visit our REITs category.