The pleasure of passive income is no secret: a stream of steady cash coming in each month or quarter through no more effort than committing some cash to the asset that generates it.
It's also no secret that real estate is a great place to invest for passive income. The market itself has been anything but passive, though, especially in residential real estate, the sector that perhaps most lends itself to the non-institutional, individual investor.
Rising prices and rents have made it tough to find bargains, but there are still some to be had. A good place to look is real estate investment trusts (REITs) that specialize in residential properties. Here are three to consider: one that owns apartments, one that focuses on renting single-family homes, and one that owns manufactured-home communities.
Each has a focus in growing markets, the inflation-fighting ability to raise rent quickly (because leases are typically short), and long records of investor payback that show their inclination to keep raising dividends.
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1. Essex Property Trust
Essex Property Trust (ESS -1.14%) is a Dividend Aristocrat. After 28 straight years of annual dividend increases, it is now yielding about 3.1% with a share price that's down about 18% year to date. And it has a long record of reliable shareholder rewards.
Since going public in 1994 with 16 apartment communities, Essex has grown its portfolio to 248 properties, including 85 in and around San Francisco, 59 in and around Seattle, and the rest in and around Los Angeles and San Diego. A $10,000 investment made at its initial public offering (IPO) would now be worth a cool $148,260, giving it what the company calls "one of the highest total returns of all public U.S. REITs" in that time.
Essex is not resting on its laurels. The company plans to spend $500 million to $700 million for new properties in 2022, while selling $100 million to $300 million in current holdings. Funds from operations (FFO) -- a key measure of a REIT's financial performance -- are now projected to come in at $13.77 to $14.13 per share after finishing 2021 at $12.49.
2. Invitation Homes
Invitation Homes (INVH -0.59%) is a giant in the single-family rental business, with a portfolio of 85,582 homes as of May 12. Nearly all its properties are close to major employment centers, good schools, and transportation corridors in the West, Southeast, Texas, and Florida.
The company says resident turnover is at its lowest ever, with the average tenure at nearly 32 months. Its portfolio is more than 98% occupied by a renter base with an average annual income for new residents of nearly $130,000.
Invitation Homes also has $1.5 billion in liquidity and has another $1.5 billion tied up in new joint homebuying ventures and expects to buy about 7,500 new homes from the PulteGroup over the next five years. That's in addition to the nearly 2,000 it has under contract with multiple builders for delivery next year and beyond.
The stock is down about 19% so far this year and is now yielding about 2.39% after raising its dividend every year since going public in 2017, including by nearly 16% in the past three years. A payout ratio of 48% based on 2022 earnings estimates makes that payout look sustainable and paves the way for more passive-income boosts.
3. UMH Properties
UMH Properties (UMH -1.06%) has the highest yield of this small group at 4.07%, but that's in part because its stock is the most beaten-down: off about 25% year to date. But this company has been public under the same founder and CEO since 1985 and since 2012, as the Great Recession was fading, has performed close to on par with the S&P 500 with a total return of about 240%.
UMH currently owns and operates 129 manufactured-home communities with about 24,200 developed homesites in New Jersey, New York, Ohio, Pennsylvania, Tennessee, Indiana, Maryland, Michigan, Alabama, and South Carolina. It also recently partnered with Nuveen Real Estate on a 219-site property in Florida.
It recently raised its dividend by 5% to $0.20 per share and has a payout ratio of about 39% based on cash flow. That's quite low for a REIT and makes this stock look like a reliable producer of passive income for now.
UMH data by YCharts.
Striking while the iron's hot (and the market's not)
Each of these residential REITs is in a fairly recession-proof business (people have to live somewhere) and operate in markets where they've been able to fine-tune their business models over time.
That and their balance sheet strength, management tenures, and proven inclination to raise their payouts as well as their rents make them good considerations to buy now -- especially given their currently depressed share prices -- and to keep holding for a good long while, too.
