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Buy Stocks That Profit from Real Estate, Not Rental Properties

October 22, 2013 4:17 pm
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For investors looking to profit from the real estate rebound in the United States, stocks that gain from growth in the sector are far preferable to actually owning the physical property.
While a recent article in USA Today reported the number of people renting single family homes in the United States is increasing, publicly traded real estate investment trusts (REITs) based on those properties — such as Silver Bay Trust (NYSE: SBY), American Homes 4 Rent (NYSE: AMH), and American Residential Properties (NYSE: ARPI) — are down.

Those are the first REITs from the single family home niche of the real estate market. For investors, buying shares of companies that prosper when the housing sector surges such as Home Depot (NYSE: HD), Lowe's Companies (NYSE: LOW) and Union Pacific Corp. (NYSE: UNP) is a far more prudent move.

According to the USA Today article by Julie Schmitt and Barbara Hansen, “More rent single-family homes,” those renting single family homes in the United States, has increased from 14.8 percent in 2006 to 18.2 percent in 2012.

That should raise concerns for investors for a variety of factors. The first is that the best tenants always leave when they can afford to buy their own home. Another is the housing market needs a rising rate of home ownership by individuals to be robust, when the opposite is happening in the United States. The rents being received are also not enough to adequately cover long term expenses for single family houses.

For those and other reasons, Silver Bay Trust is down almost 16 percent for 2013. Over the same period, American Residential Properties has fallen more than 17 percent. American Homes for Rent is up slightly for the year, but beneath its 52-week high.

None of these REITs is profitable; with operating margins that are well into the double digit negative territory (-74.40 percent for American Homes 4 Rent, -81.70 percent for Silver Bay Trust, and -99.30 percent for American Residential Properties).

By contrast, Home Depot, Lowe's and Union Pacific have performed very well due to the housing recovery. Each is profitable with strong operating margins. Railroads like Union Pacific Corp. perform well when real estate is booming from hauling lumber and other building materials. Home Depot and Lowe's both gain due to increased sales of home improvement materials, appliances, and other needs for the real estate sector.

While gaining from a healthy real estate sector, these companies are not captive to the housing market. Railroads move goods for export markets, agricultural supplies and fuel, among other items. No matter if a home is rented or owned, it must be maintained. That provides a constant stream of business for Lowe's and Home Depot. For investors seeking to profit from housing, these companies are far better long term holdings.

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