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Real estate has taken a back seat for most investors. But that's a mistake. Sure, there are signs of trouble in some assets, but the best REITs are well positioned to make you money right now. And they can be gobbled up with high yields you might never see again.
Today, we'll show you which REITs are worth buying right away. But we'll also show you one that might not recover from the changes happening around us. We've got you covered from all sides.
The coronavirus and now civil unrest are changing the face of some cities around the United States. Imagine the financial pain of small business owners finally able to begin opening their business only to see protests keep business traffic away.
Work from home is changing the office market, especially in the big cities. Why pay millions a year in rent when you cut that drastically by implementing long term work from home policies?
Retail was already changing because of e-commerce. The coronavirus and recent protests have combined to hit the sector, and we have no idea what retail real estate looks like going forward.
It would be easy to take the cynical approach and avoid real estate altogether, but the reality is that times of significant change offer the opportunity for big profits. Digging into the companies and talking to the players in the industry can help us find the best REITs, those that can lead to huge profits and payouts and which one we need to avoid.
One of the Best REITs Is Dominating the Suburbs
Dividend yield: 8%
Between the coronavirus pandemic, lockdowns, and unrest, people are fleeing large cities for cozier properties in the suburbs. That creates an opportunity to invest in residential rental property at discounted prices right now.
One of the more attractive segments of the residential market is single-family homes.
Front Yard Residential Corp. (NYSE: RESI) has a portfolio of 14,442 homes, primarily in the southeast, although they do have Midwestern locations as well. The portfolio is 97.7% leased, and April rent collections exceeded 99% of Front Yard's trailing 12-month average.
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Back February, Amherst, a real estate investment and advisory firm, offered to buy Front Yard for $12.50 a share. Amherst backed out when the coronavirus hit, saying that the health crisis made closing the deal operationally difficult. Amherst had to pay a $25 million fee to Front Yard to terminate the deal. It remained invested as Amherst purchased 4.4 million shares of Front Yard common stock in a primary issuance at $12.50 per share for an aggregate purchase price of $55 million. Plus it added another $20 million two-year unsecured loan facility to Front Yard.
Front Yard shares have to gain over 60% to get back to the price one of the smartest real estate investors in the country was willing to pay to buy the single-family rental business. While we wait for that to happen as the economy recovers, we will collect a dividend of about 8%.
This REIT to Buy Avoids Mega-Cities
Dividend Yield: 8%
BRT Apartments Corp. (NYSE: BRT) also avoids those markets hardest hit by the virus and civil unrest in recent months. They own 39 multifamily properties located in 11 states, with a total of 10,778 units. Most are in the southeastern and Texas sunbelt markets as well.
BRT reported that by mid-May, they had collected 96% of rents after receiving 98% in May. The fact that they own B class properties with an average rent of just about $1,000 a month means its tenant base is either working or collecting enhanced unemployment benefits and can easily pay rent.
The scary stories about tenants not paying rent spooked investors back in March, as they should have. However, that crisis has been averted thanks to quick action by the U.S. Federal Reserve and Congress to protect jobs and make sure those that lost jobs had cash to pay their bills. Most rent is being paid right now, and those that can pay have often been able to work out payment plans with the property owners.
Management is focused on improving the value of the properties and growing cash flows over time. They have plenty of reasons to stay focused as the management team owns 38% of the stock.
As the economy recovers, BRT needs to increase by 60% to trade back to the 52-week highs. I see no reason that should not happen, and along the way, we collect a dividend of almost 8%.
But not all residential REITs are going to be as successful as these two.
Whether they are in the hardest-hit markets or their management team hasn't figured out how to keep the cash flowing, there are risks to owning just any REIT.
And this REIT doesn't belong anywhere near your portfolio...
Steer Clear of This Residential REIT
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The core center city property market is going to be questionable for some time. I think investors should probably avoid Equity Residential (NYSE: EQR) for now.
This REIT focuses on some of the most expensive city residential markets in the country, including San Francisco, New York, and Washington, D.C. These are cities that will see an outflow of residents this year. Just look at Facebook and Google, two of the biggest employers in San Francisco, who are now allowing employees to work from anywhere in the country. Why pay San Francisco prices when you can live anywhere else?
Chair Sam Zell is one of the best real estate investors in the country, but not even he can offset the potential damage of the healthcare and civic crisis major markets are facing. Equity Residential Properties apartments are in the Boston; New York; Washington, D.C.; Seattle; San Francisco; Southern California; and Denver markets.
With a yield below 4% and what is probably limited upside, I would avoid the largest apartment REIT right now.
It might not bust your portfolio, but it's only going to tread water for the foreseeable future and tie up your money you could better invest elsewhere.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.