Owning a rental property isn’t as easy as it may sound, even if you hire a property manager. But that’s not the only way to invest in the housing market.
Another option to consider is buying shares in AMH (AMH 0.73%), formerly known as American Homes 4 Rent. This real estate investment trust (REIT) owns a large and diversified portfolio of single-family homes. It’s not exactly like owning your own rental property, but it gets you many of the most important benefits while saving you hassle and risk. Here are some key facts to consider.
1. Diversification matters
Most small real estate investors will only own a few properties, perhaps only one, in addition to their primary residence. That means a vacancy at a single property can have a huge impact on your cash flow. Similarly, an unexpected cost at a property (like replacing a broken furnace) will be a heavy burden. AMH owns more than 59,000 single-family homes. No single property will have a discernible impact on its overall results or the income you receive from the REIT’s dividends.
On top of that, with only a handful of assets, most small real estate investors are exposed to just one or two markets. AMH’s portfolio is spread across the Southeast, Midwest, Southwest, and Mountain West regions of the United States. It would be almost impossible for most smaller landlords to achieve that kind of diversification.
2. Reliable dividend
To be fair, AMH’s 2.2% dividend yield isn’t exactly huge. That said, it is notably higher than what you would get from an S&P 500 index exchange-traded fund (ETF), currently around 1.65%. But the real key is that the dividend has been held steady or increased every year since AMH started paying dividends in 2014, the REIT’s first full year of life as a public company. Meanwhile, in the third quarter of 2022, AMH’s adjusted funds from operations (FFO) was $0.33 per share versus a dividend of $0.18 per share. That leads to an adjusted FFO payout ratio of around 55%, which is very conservative.
3. Rent and appreciation
When it comes to REITs, dividends are a key factor. On that score, rent growth over the past couple of years has allowed AMH to increase its quarterly payment to $0.18 per share per quarter from $0.05 per share per quarter in 2020. In other words, investors are benefiting directly from the business’ strong operating results.
However, that’s not the only story here. AMH started building its portfolio in the aftermath of the Great Recession, which was driven by a housing downturn. It was opportunistically buying homes on the cheap. The stock has doubled since its IPO, reflecting the fact that housing prices have gone up since that point. Big gains like that aren’t likely to occur again, but if home prices increase over time, the increase is likely to be reflected in a higher stock price just the same. In other words, if you are watching housing prices go up, AMH is an opportunity to get in on.
Almost like doing it yourself
AMH’s stock price has pulled back roughly 25% since the start of 2022 as interest rates have headed higher. So there is likely to be more price volatility here than if you bought a rental property yourself. And yet, that drop has pushed the yield toward historically high levels. And you get the benefit of professional management and diversification. AMH isn’t an exact replacement for buying a rental property, but if you are conservative, it might be worth a deep dive when you consider the complications and risks of becoming a landlord.