Rental Income: Earn a 7% Yield as a “Virtual Landlord”
June 26, 2019
Collect Rental Income Without Dealing With Tenants
If you’d like to earn regular rental income but don’t want the hassle of dealing with tenants, then this might be one of the most important articles you ever read.
Regular readers know about the current bull market in housing. Thanks to the limited supply of rental properties, landlords have enjoyed low vacancy rates and high rents. That has translated into soaring property prices in addition to growing income streams. Of course, not everyone wants to deal with unclogging toilets, collecting security deposits, or chasing down rent checks.
For that reason, I have longed recommended real estate investment trusts (REITs). These partnerships allow investors to collect ongoing income from rental properties as a “virtual landlord” without having to deal with tenants.
Case in point: Mid-America Apartment Communities Inc (NYSE:MAA).
This partnership owns over 100,000 apartment units across 17 states, concentrated mostly in the southeast corner of the United States. Given that this is the fastest-growing area of the country, Mid-America has found plenty of opportunities to boost its cash flow through acquisitions, developments, and rent hikes. And because rent is one of the last bills people skip during a recession, Mid-America has paid over 100 consecutive quarterly common dividends to unitholders.(Source: “Corporate Profile,” Mid-America Apartment Communities Inc, last accessed June 18, 2019.)
To see how lucrative owning rental properties can be right now, take a look at Mid-America’s recent financial results.
In May, management raised rents on renewing tenants by seven percent. Last quarter, fund flows from operations (FFO) per share, a common measure of business performance in the real estate business, jumped six percent. For context, most real estate analysts look for FFO-per-share growth between two or three percent annually. Mid-America’s growth numbers truly jump off the page. (Source: “NAREIT REIT Week: 2019 Investor Conference: June 4-6, 2019,” Mid-America Apartment Communities Inc, June 4, 2019.)
This has created a great income stream for investors. Since 2011, management has boosted its distribution at a six-percent compounded annual clip. Today, Mid-America pays a quarterly distribution of $0.96 per share, which comes out to an annual yield of 3.5%. (Source: “Dividends,” Mid-America Apartment Communities Inc, last accessed June 18, 2019.)
Wall Street, it seems, has taken notice. Over the past few months, billionaire Jim Simons has quietly accumulated a 1.5-million-unit stake in the business. Other hedge fund managers, including Ken Griffin, Israel Englander, and Paul Tudor Jones, have started buying up units as well. (Source: “Mid America Apartment Communities Inc. (MAA) – Hedge Fund Holdings,” Insider Monkey, last accessed June 18, 2019.)
Chart courtesy of StockCharts.com
The Bottom Line on MAA Stock
Investors have two choices to cash in with Mid-America Apartment Communities.
One is that they can buy the common units of MAA stock. This investment pays a lower upfront yield but has more potential for capital gains and distribution hikes over time.
Alternatively, investors can opt for the Mid-America Apartment Communities Inc. 8.5% Cum. Redeem. Pfd. Series I (NYSE:MAA.PRI). The distribution from these preferred shares won’t grow over time. They do, however, offer a much higher upfront yield of almost seven percent. And because preferred shareholders stand first in line to get paid during a bankruptcy, these units will hold up better in a downturn.
For investors looking for steady rental income, I recommend giving both options a look.
