Buy This High-Yield Apartment REIT and Hold It for the Next Decade

Apartment pricing has seen a huge boom in the last few years, with average rents growing over 21% since February 2019. Some of this is attributable to the overall increase in absolutely everything since the pandemic, while some of it is more likely due to shortages of rental units that started during the Great Recession.

By some estimates, the U.S. will need over four million new apartments to meet demand by 2035, and we're not keeping up.

So, it makes sense to add some apartment real estate investment trusts (REITs) to your portfolio. The demand is immense and is only expected to increase. And with single-family homes facing an equally painful shortage, apartments are faster to build and can house people more efficiently, making them a vital part of the solution to the nation's overall housing problems.

There are many apartment REITs to choose between, but for my money, it's MAA (NYSE: MAA), formerly known as Mid-America Apartment Communities.

Reinvestment is key to MAA's success

I spent a decade working directly with both investors and developers in the real estate industry, and one thing that I never really got over was the immense waste that often takes place. Sometimes, it really is more efficient to tear down a building than to fix it, but too often, those buildings are torn down because they weren't fixed or stabilized sooner, which just results in a lot of added expense.

This is one of the things that I really love about MAA. Instead of just selling off buildings and buying the shiniest new thing, the company actually has a reinvestment schedule by which it adds value to its existing portfolio every few years. It also buys existing buildings that are in need of updating or remodeling, and does the same with those. This isn't to say that it never builds new apartments, but it definitely tries to minimize that massive expense.

Some of the buildings it operates have been owned by the company since the 1980s and 1990s, which is rare to see in the multifamily space. But holding on for the long term is paying off for MAA.

For example, this year, as of the second quarter, it had redeveloped 2,796 units at a cost of about $6,213 per unit. That might sound like a lot of money, but each unit saw an increase of 7.6% in rent, or around $107 per month. At that rate, it only takes about 4.8 years to pay for these reinvestments.

Reinvestment includes apartment interiors, but also covers updating the exterior of the building, the grounds, and the common spaces, which enhances the whole property -- even the units that haven't been remodeled yet.

Rents are up, but so is occupancy

Rents have seen a huge jump in the last five years, but MAA is able to keep them more affordable, which not only helps tenants, but also keeps them in their homes longer. For example, the average effective rent for the second quarter was $1,690 per month, versus the national median in March 2024 of $1,987.

Tenants notice this kind of thing pretty quickly when they're apartment hunting. That's why MAA has been able to maintain a really high occupancy rate of 95.4% in 2024 with only 43.5% residential turnover.

To put it another way, nearly 60% of residents stayed and signed a new lease in the 12 months leading up to and including the second quarter. Every resident who stays and signs a new lease is a resident who doesn't bang up walls, destroy carpet while moving out, or leave an apartment empty for a week or a month while it's being painted and cleaned for the next tenant.

MAA is a reliable dividend payer

Since fiscal year 1994, MAA has never had to reduce a dividend payment, and has gone from $1.21 per share annually in 1994 to this year's likely dividend of $5.88, a 385% increase over time.

Not only is it a reliable dividend payer, it's also a solid one, with a 3.79% forward dividend yield as of Oct. 4. So, for every $1,000 you put in at today's share price of $154.62, you get back $37.90.

MAA's track record and future-proofing make it a long-term hold

Apartments could continue to have a bit of a bumpy road for a few more years, but more likely, that trouble is over and housing shortages will push them into increasing profitability for companies that are being proactive about their units. MAA has a solid track record of creating value where it didn't exist before while also keeping its apartments full of happy tenants who renew their leases.

You simply couldn't ask for a better combination.

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Kristi Waterworth has positions in Mid-America Apartment Communities. The Motley Fool has positions in and recommends Mid-America Apartment Communities. The Motley Fool has a disclosure policy.