Real estate has been an enriching investment. While the right deal can make an investor a lot of money seemingly overnight, the sector does its best work over the long term. A combination of steadily rising rental income and capital appreciation has enabled real estate to deliver strong compounded total returns for investors willing to hold it for a decade or more.
Thanks to Congress, the power of real estate investing is open to everyone in the form of real estate investment trusts (REITs). Here's a look at two REITs that could prove to be enriching investments for investors willing to hold them for the long term.
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A sunny future
Manufactured home communities have been some of the top-performing real estate investments over the past two decades. The sector has grown its net operating income (NOI) at a 4.8% compound annual rate since 2000. That's second only to self-storage properties and nearly double the rate of more traditional real estate investments like industrial, multifamily, retail, and office.
The sector's above-average growth has enabled Sun Communities(NYSE: SUI), a leading residential REIT focused on manufactured home communities, to enrich its investors over the years. It has delivered a 15.3% total annualized return since its initial public offering (IPO) in 1993, growing a $10,000 investment into nearly $575,000.
Another driver of Sun Communities' returns has been its consolidation strategy of steadily acquiring manufactured home communities from smaller investors. It has also taken its consolidation strategy to other property types, including RV resorts, marinas, and holiday parks. While it's a leader in all these categories, the sectors remain highly fragmented, providing Sun Communities ample opportunities for further consolidation. Add that to steady rent growth, and the REIT should be able to continue enriching its investors over the long term.
A first mover in what's become a red-hot housing market
The single-family home rental market shares a lot of similarities with manufactured homes. It has delivered above-average NOI growth and remains highly fragmented. Those two characteristics have benefited Invitation Homes(NYSE: INVH), a residential REIT focused on the sector. It was one of the first companies to concentrate on building a large-scale single-family rental platform, creating a lot of value for investors in the process.
The REIT has delivered an 18.3% annualized return since its IPO in 2017. That helped turn a $10,000 initial investment into over $24,000 in a few short years.
Invitation Homes has benefited from strong NOI growth. Since 2017, its same-store portfolio has grown its cumulative NOI by 34.3%, roughly triple the national multifamily average of 11.8%.
That above-average growth seems likely to continue. Demand for single-family rentals is rising due to the tight housing market and the need for more space as more people can work from anywhere. Meanwhile, the single-family rental market remains highly fragmented. These market conditions allow Invitation Homes to continue benefiting from above-average income growth while it consolidates this fragmented sector.
These REITs could steadily enrich their investors.
Real estate has been an amazing wealth creator, enabling investors to benefit from steadily rising income and property price appreciation. However, property types that are off the beaten path, like manufactured-home communities and single-family rentals, have stood out for delivering superior performance. REITs focused on those properties like Sun Communities and Invitation Homes have been enriching investments. Since demand for affordable housing remains as strong as ever, both REITs could continue to be big winners in the coming years.
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Matthew DiLallo owns Invitation Homes and Sun Communities. The Motley Fool owns and recommends Invitation Homes and Sun Communities. The Motley Fool has a disclosure policy.
