You Don’t Need Billions To Buy Discounted Rental Properties

five 3-storey houses in-lined on street

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If you’re thinking of buying a house right now, my advice to you would be not to sign those papers just yet. I’ve been studying and investing in the real estate market for over three decades. And today, it’s presenting an opportunity I’ve rarely seen. In fact, let me tell you why the white picket fence can wait --and what kind of living situation looks attractive right now instead.

According to a LendingTree survey, 94% of people say owning a home is part of the American Dream. But anyone who’s bought a house in the last few years can tell you: it’s expensive.

It’s not just that the price of homes has gone up due to inflation. High interest rates are also making mortgages more expensive. Plus, insurance rates are exploding higher.

That’s why Realtor.com reports it’s cheaper to rent than to buy in the 50 largest cities in the country. The monthly cost of buying a starter home is 60% higher than renting. Meanwhile, rental rates have been falling since last summer. And apartments are expected to stay cheap this year.

Today, I’ll explain why apartments are so affordable right now. I’ll also show you one way to profit from this trend while collecting a reliable income.


Why Apartments Prices are Falling

Let’s step back a little to examine what’s changed recently and how we got here in the first place. In summer 2021, apartment rental rates shot up by 18%. It was one of the largest yearly increases in history. Apartment rental rates usually increase less than 4% each year. That huge increase in rents sparked an apartment building frenzy, as real estate developers rushed to create more units to take advantage of the red-hot market.

On top of that, owners of office buildings emptied out by the work-from-home trend started converting them to apartments as well. Predictably, they overdid it. It takes a couple of years to build an apartment complex, so all those new apartments are just now finishing construction and hitting the market, looking for renters.

According to property management software company RealPage, an estimated 671,000 apartment units will be completed in 2024. That’s the highest number of new apartments created in a year since 1974.

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The large increase in supply means apartment vacancies are now back to pre-pandemic levels, and rents are falling as more new builds flood the market.

For these apartment owners, lower rents mean it’s harder to turn a profit. On top of that, many owners financed these new apartments with low interest loans that are now coming due. Now, some can’t afford to pay higher interest rates as rental rates drop.

According to S&P Global Market Intelligence, $3.5 billion worth of apartment loans have fallen behind on payments. That’s an 81% increase from last year. All of this has led to a selloff in the apartment sector.

Banks are starting to foreclose apartment properties and selling them for cheap. This means there are opportunities for investors to scoop up apartment properties at attractive prices.

Last week, private equity firm Blackstone announced it was buying Apartment Income REIT for $10 billion. That big bet shows that smart money managers think it’s a good time to start looking for deals on apartment properties. And while they can spend billions on deals like this, that doesn’t mean there aren’t good opportunities for regular investors like us, too.


How You Can Profit From the Selloff in Apartments

If you’re not looking to move into an apartment to take advantage of today’s lower rents, you can still profit from this selloff right from your brokerage account. One way is through Essex Property Trust (ESS). Essex is a real estate investment trust (REIT) that owns more than 62,000 apartments in Los Angeles, San Diego, San Jose, and Seattle.

Even though there’s a glut of apartments hitting markets across the country, the number of new units is not the same in every city. Essex expects total housing supply in its markets to increase by just 0.5% this year. And the company expects to see its rental rates keep increasing this year even as rents decrease in other parts of the country.

And here’s the best part for income-focused investors like us: as a REIT, Essex is required by law to give 90% of its taxable income to its shareholders. So those increasing rents mean more dividends in the future.

Essex is a reliable income grower and has increased its dividend 30 years in a row. In fact, it just announced another 6.1% increase last month. It currently yields 4.1% annually. But that hasn’t stopped the market from selling off its shares along with the rest of the apartment sector. Which means it’s trading at a discount.

Essex shares trade at 18x adjusted funds from operations (AFFO). This financial metric tells shareholders how much cash flow a REIT has available for dividends.

Essex has historically traded at an average of 22x AFFO. So, it’s recently been trading at an 18% discount. That means it’s a great time to invest in this reliable growing income stream and cash in on the selloff in the apartment sector right from your brokerage account.


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Brad Thomas is the Editor of the Forbes Real Estate Investor.

Disclaimer: This article is intended to provide information to interested parties. ...

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