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How to cash in on California’s red-hot rental market

Dear Retail Investor,

I live in one of the most beautiful parts of North America – Sonoma County in Northern California.

The region features an embarrassment of riches.

We’re blessed here with stunning valleys… towering redwoods… scenic lakes… majestic mountains… dramatic coastlines…

It’s paradise for an outdoor nut like me.

And the weather!

You get mild winters, rain-free summers and abundant sunshine (over 300 days of sun a year).

Yes, it’s a superb place to live… but there’s a serpent in this Eden.

The housing prices in California are murder

Want a nice 3-bedroom ranch house with a garage?

Prepare to cough up $1.5 million.

Condo? That’ll be a cool $800,000, please.

Even fixer-upper homes go for north of $600,000.

These sky-high prices are too much for me (and millions of other Californians).

So I rent.

But that’s no bargain, either.

Your typical 1-bedroom around here goes for about $2,400 a month.

When I moved into my current abode in 2013, my rent was about $1,000 a month.

I now pay $1,500 a month. So I’ve absorbed a 50% increase in seven years.

That’s a pretty hefty rise by anyone’s standard.

Rents have shot up all over the U.S. in recent years – nationally they’ve spiked 32% from 2010-2020.

California has seen the most dramatic increases in the country.

For example, rents in Los Angeles are up 65% in the last 10 years .

San Diego’s have risen 48% during that time.

And San Francisco?

Try 70% on for size.

Now San Francisco boasts the nation’s second highest average rent, an outrageous $3,188 a month. 

With super-expensive rents the norm in California, there’s obviously a lot of money to be made from tenants here.

Of course, you’d have to be a landlord.

You’d have to collect rents… clean out gutters… unclog toilets… and deal with the occasional indolent tenant.

Obviously, you’d need to own the property you’re renting.

And we just saw how expensive that can be.

Fortunately, you don’t have to own an apartment complex to cash in on California’s red-hot rents.

You just need to invest in a good real estate investment trust (REIT) with large holdings in the state.

How REITs can help you profit from the surge in California property prices

REITs are companies that own and (usually) operate income-producing real estate.

These companies can own many kinds of real estate, like apartment buildings, offices, shopping centers, warehouses, hotels and hospitals.

The best thing about investing in REITs is they typically provide high dividends.

The reason? They’re required by law to distribute at least 90% of their taxable income to shareholders every year.

That requirement makes them appealing to retirement savers and anyone looking for a stream of steady income.

What fuels these dividends, of course, is tenant-paid rents.

Obviously the wealthier your tenants, the more likely it is you won’t have any problems collecting your rents.

So from an investing standpoint, you want an REIT whose holdings are targeted to affluent renters.

Here’s one REIT with outsized exposure to affluent California renters

I’m talking about the Kilroy Realty Corp. (NYSE: KRC).

Kilroy owns 808 residential units in southern California.

It also owns and rents office and mixed-use projects throughout northern and southern California.

That gives Kilroy investors the chance to profit on places where Californians live and work.

The company also has commercial rental properties in Seattle, Washington – another region that’s seen explosive growth in property prices.

And now Kilroy’s getting involved in the Texas commercial real estate market.

Today most of Kilroy’s holdings are in the California commercial space.

And by extension, that’s where it makes most of its money.

Many of its tenants are heavyweights in the technology sector.

They include Salesforce.com (NYSE: CRM), Dropbox (Nasdaq: DBX), Netflix (Nasdaq: NFLX), Amazon (Nasdaq: AMZN) and Adobe Systems (Nasdaq: ADBE).

Thanks largely to these deep-pocketed, high-tech giants, Kilroy’s stock has gained about 72% since October 2020. 

But there is one potential downside to consider with Kilroy.

The company has most of its eggs in the California technology basket.

So if some of its tenants were to leave California for lower-tax jurisdictions, the company could take a significant hit.

However, this is likely why the company is dipping its toe into real estate assets in Texas. 

Texas has benefitted in recent years from California-based companies relocating to the Lone Star State for its lower corporate tax rates. 

Many California residents have also relocated to Texas to capitalize on its zero income tax policies. So this likely bodes well for Kilroy’s future.

Here’s another REIT in prime position to profit in California

That company is Essex (NYSE: ESS).

Essex is an apartment owner with operations in northern California, Los Angeles, Orange County and Seattle.

It specializes in developing, redeveloping, and managing multifamily residential properties in these areas.

 Currently Essex owns 246 apartment communities.

 All told, they comprise about 60,000 apartment homes.

 Essex also is developing six more properties.

 Current investors have had many reasons to be happy with this company.

 For one, Essex has increased its dividend annually for 27 straight years.

 That’s impressive!

 It’s pulled this rare feat off by focusing on high-barrier-to-entry markets.

 In other words, it pretty much just rents to relatively rich people.

 That allows it to collect premium rents.

 Like Kilroy, Essex also benefits by having most of its properties in proximity to high-tech companies.

 As a result, its tenants tend to make high salaries, which enables them to afford expensive leases.

But on the flip side – like with Kilroy – the company’s heavily dependent on the fortunes of the tech industry.

If the tech industry were to suffer a downturn that caused mass layoffs, Essex’s prospects could suffer.

So there you have it – 2 REIT plays that could help you take advantage of California’s exploding rental market.

Even if you’re not interested in buying rental properties yourself (or you don’t have the cash to do so), there are easier (and possibly faster) ways to profit from this trend. 

I’ll be back soon with more investing ideas for you to consider.

Until next time, 

Doug Fogel
Contributing Editor, Dear Retail

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