Earn Up to $1,200 in Monthly Rental Income Without Becoming a Landlord

The following is a guest post from Robert Baillieul

Bio: Robert is a stock market evangelist and fan of good ol’ fashion dividend stocks. You can follow him on Twitter @RobertBaillieul.

It’s one of the best income sources around… owning real estate.

Buy a few houses. Love your tenants. Pay off the mortgages. In 20 years or less, you own the properties free and clear, but your tenants continue to pay you rent month after month. But being a landlord is also a hassle. There’s the regular maintenance like shoveling driveways and unclogging toilets. Not to mention the headaches of collecting security deposits and dealing with unruly tenants. At least, that’s how things used to be. There’s another way to earn steady, monthly income through rental properties WITHOUT becoming a landlord. And by my estimates, less than 1% of people even know this opportunity exists. You never have to set foot on a property. All you have to do is sit back and collect rent cheques of $350… $750… even $1,200 per month. Let me explain…

How to collect monthly rental income without becoming a landlord
It’s no secret that real estate is a great way to generate income. That is, if you don’t mind spending your time mowing lawns, collecting security deposits, and chasing down deadbeat tenants!
Thing is, aside from cashing those monthly rent cheques, being a landlord is kind of a hassle. Sure, we could all use the extra income. But buying rental properties is certainly not for everybody. That’s why you might be interested to learn about a way to collect monthly ‘rent cheques’ without the hassle of becoming a landlord. Simply put, I’m talking about partnering with already-established, highly successful property owners through real estate investment trusts, or REITs.
As anyone who follows my work knows, I’m a big fan of this industry. In essence, a REIT is like a real estate holding company. They own properties, collect rents from tenants, and pass on the income to investors.

But there’s another reason why partners do so well for themselves. Thanks to a special agreement with the government, REITs pay NO corporate income taxes. But to qualify for this loophole, these firms are required by law to pass almost all of their profits on to their investors. That’s why these trusts are able to pay out such consistent, oversized rent cheques. Many of them sport yields as high as 5%… 7%… even 10%.
It’s not hard to see why being a ‘Virtual Landlord’ through REITs is a better deal than owning rental properties. REITs are publicly traded, so they can be bought and sold just like any stock. They’re very liquid and you can get started with as little as $20. As a partner with these landlords, you never have to chase down late payments or fix a broken toilet in the middle of the night. All you have to do is sit back and wait for the cheques to arrive in your brokerage account. Best of all, REITs are diversified. With a click of the mouse, you can diversify your portfolio across thousands of properties, in dozens of geographies, and several property types. For me at least, that makes it easier to sleep at night.

The five types of REITs you should know
Analyzing a REIT is a little different than an ordinary stock. There’s a whole new type of lingo that you have to learn, which goes well beyond the scope of this article. But if you start studying REITs yourself, here are the five main types of trusts you can choose from.

  • Residential REITs: Trusts like Boardwalk REIT (BEI.UN.TO) manage apartment buildings. This category is the safest you’ll find in the sector. Afterall, people always need to put a roof over their heads.
  • Retail REITs: These companies typically own malls or shopping centers. They earn profits by leasing space to retailers and skimming a percentage of their sales. For instance, RioCan REIT (REI.UN.TO) is the largest owner of shopping malls in Canada, and its fortunes tend to be tied to consumer spending.
  • Office REITs: These companies own office buildings and lease space to businesses. An example is Dream Office REIT (D.UN.TO), which owns properties across the country. This sector is particularly vulnerable to business downturns, though they tend to sport the highest yields around.
  • Industrial REITs: Similar in some ways to office REITs, these companies provide customized space that businesses use for specialized purposes. For this reason, turnover is lower. But industrial REITs are also slower than others to recover during an economic boom.
  • Diversified REITs: Not every REIT can be fitted neatly into one category. For example, H&R REIT (HR.UN.TO) owns a hodgepodge of retail, office, and industrial properties. How these REITs behave is specific to each one’s focus.

Earn a 5% yield from this real estate ETF
Of course, if you’re lazy like me, you can buy the entire REIT universe through exchange traded funds. For instance, I own the iShares S&P/TSX Capped REIT Index (XRE.TO), which holds Canada’s 15 largest trusts. At a cost of just 0.55% annually in management fees, you’d be hard-pressed to find an easier way to invest in real estate. The best part, XRE pays investors monthly, so you don’t have to wait to start cashing in. Starting with a $30,000 investment, you can earn an extra $120 per month in distributions. If you invest $300,000 (about the cost of buying your own rental property), you can collect $1,200 in monthly rental income.

Disclosure: Robert Baillieul owns shares in iShares S&P/TSX Capped REIT Index Fund (XRE.TO)

23 thoughts on “Earn Up to $1,200 in Monthly Rental Income Without Becoming a Landlord

  1. Bernie says:

    Good article! If you’re looking at Canadian REITs from a dividend growth perspective the only 2 REITs on the “Canadian Dividend All-Star List” are Canadian REIT (REF.UN) with a 13 year streak and Plaza Retail REIT (PLZ.UN) with a 12 year streak. All others have less than 5 year streaks. I own PLZ.UN & have REF.UN on my watch list.

  2. Robert Baillieul says:

    Thanks Bernie!

    Plaza Retail REIT is definitely a hidden gem. Boring, low key assets that crank out steady cash flow. It’s not an investment that will impress your friends at the next cocktail party, but you won’t regret buying it 20 years from now.

    Rob

    • Thanks for stopping by and the input Bernie and Robert. I am not familiar with Plaza REIT and will definitely look into it. Boring is good. Its what great investments are made of.

      cheers
      R2R

  3. Hi Great article Robert! I am new to the DGI community; new to the whole investing community as a whole. I am slowly gathering information on dividend growth stocks and I do notice that many DGI’ers have a REIT, especially O, in their portfolio. I like how you explained that you can essentially own thousands of properties without the headache of managing each one. I never really looked at REITs that way. I always thought real estate as a very laborious investment, but having it was a means to diversify. Now I can do that with REITs! Thanks!

    Ron

    • Robert Baillieul says:

      Thanks Ron!

      That’s why I love getting the word out about REITs. They’re so much simpler than buying rentals.

      Rob

  4. My only problem with this is that if the housing market crashes again like it did in 2008 (it could, if valuation gets high enough. I hear the San Francisco area is really pricy), thene the loss on that REIT can greatly outweigh the dividends you’re getting.

    • Robert Baillieul says:

      That’s a fair point Tony.

      Defaults. Recessions. Rising interest rates. These are the things that can trip up REIT investors. But obviously, there are risks with any investment.

      I try to think of risk like this…

      Over the next century, there will be 15 or so bad years in the real estate market. I have no idea when they will occur. But people and businesses will always need to put a roof over their heads.

      As the landlord, I’m going to receive a rent cheque each month. Those payments should more or less keep up with inflation. I can then reinvest those profits into more buildings and earn yet more rent cheques. Over that time, the purchasing power of my dollars today should grow multi-fold.

      Compare that to alternatives like cash or GICs. Sure, I’ll never see them crash 50%. But after inflation and taxes, the goods and services my dollars can actually buy is going down each year!

      As Garth Turner once wrote, you never get the girl earning interest :P. When you start thinking in timescales like a century, which option really seems risky?

      In terms of valuations in real estate today, they’re definitely rich. But everything is local. In markets like Toronto, Vancouver, and San Fran, newbie investors are collecting 1% cap rates on condos. That’s absurd.

      However, things are more reasonable on the institutional side and in different markets. Cap rates on quality apartment buildings, for example, are hovering around 5%… 6%… 7%.

      Obviously if interest rates go up, investors buying REITs today won’t be too happy. But IMHO, that’s a reasonable (though certainly not remarkable) premium relative to crappy bonds.

      Rob

  5. I own physical real estate property and have owned REITs in the past. I currently do not as I am waiting out the rise in interest rates which could well demolish REIT share prices.

    I say that to add that owning physical real estate directly has some big advantages that I see that I do not get with REITs. I get a far better cap rate (8.58%) even with a property manager overseeing my properties then I get vs the yield from REITs. That includes setting aside money for future repairs and maintenance.

    Now for the common retail investor? Absolutely REITs are the way to go to get started. But owning directly shouldn’t be discounted too quickly.

    • Hi PMU,
      Good points. Owning real physical property can be advantageous in some cases. However, a raise in interest rates not only cuts the price of REIT share prices, but also the property values, so I think that applies to both aspects of investing in real estate.

      Thanks for sharing
      R2R

  6. REITs are great investments and so are rental properties. As I’ve learned, you cannot directly compare them because that would be like comparing apples to oranges; they are vastly different.

    When people think of rental property, they too often assume that it “takes too much work” and I don’t want to be “unclogging toilets at 3:00 AM”. Seriously? How many landlords have ACTUALLY unclogged a toilet at 3:00 AM? I know I never have, and never will… If you don’t want to do the work, hire a PM…. Gross generalizations and assumptions are always a dangerous thing to make.

    I wrote an article comparing the two investment vehicles, highlighting a lot of the “hidden benefits” that are too often overlooked with rentals:

    http://www.fifighter.com/finance/real-estate-thoughts/2014/04/reits-vs-rental-property-comparing-apples-to-oranges/

    And if you still can’t unclog that toilet, upgrade and get a Champion 4 (or some other high-end toilet) 😉

    • Good points, FI Fighter. Gross generalizations are never a good idea. The idea of getting a PM to take care sounds like the way to go, esp when you have multiple properties and/or out-of-town. How much do PMs usually cost as a percentage point, btw?

      Thanks for sharing your post and the video. Will check em out.

      Best wishes
      R2R

  7. PMs typically charge between 8 to 10% of gross month rent. In the Bay Area and other expensive markets, it’s probably less, around 5 to 7% because the rents are so high. I self-manage locally to save on expenses.

    Cheers!

  8. Benji says:

    Hi All,

    Not sure I quite understand the whole thing. I can understand if you were someone with the liquid and were choosing between the 2 of buying to let or REITs, however if you were someone with a set amount and could leverage it off to a mortgage compared to putting it in a REIT, then I don’t see how there is even a comparison.

    I don’t know if I’m missing something here but let me know if what I am saying is correct, and it’s just in detail, just a brief outline and calculations:-

    Mortgage:-
    25% down on a 200k house = 50k liquid
    Mortgage of 150k over 10yrs = $1500 per month
    Rent from the condo per month =$1600 per month ($100 extra for maintenance if needed)

    Therefore, there will be no income generated for 10 yrs to myself, but in 10 yrs time I will have a property that is worth 200k+ with a rental income every month of around $1600+, so close to a 10% yield and I would also have a 200k+ property that only cost me 50k, so therefore that is also a 400% increase in my initial investment.

    Overall – $50k and in 10 yrs it is now $200k with 10% dividend of $20k per year

    REIT:-
    50k liquid to invest
    Yield is 5.5%-6% = $3k per year income
    Over the 10 yr period, I put the $3k back in and after the 10 yr period this has totaled to around $85-90k.
    So overall a $35k – $40k profit.

    Overall – $50k and in 10 yrs it is now $90k with a 6% dividend of $5k per year.

    Please tell me how there is a comparison as to which one to take, or am I missing something.

    Thanks All

    Ben

    • Thanks for sharing your thoughts, Ben. Investing in the real estate market and REITs is not the same — its apples and oranges. The guest poster has simplified the concept with this article.

      R2R

      • Benji says:

        Hi R2R,
        Thanks for the reply.
        Yes i know there would be a big difference, but i wanted to ask the questions from my post just going off the title of the article, How you can earn on REITs against owning and being a landlord.
        I just wanted to know from you and the other members of this chat if i am wrong in my calculations and if i am missing something?
        As for me, the return on investment for becoming a landlord smashes the ROI on REITs, and i would have thought people would rather become landlord with the extra work and hassle it entails for the end result of a lot higher ROI.
        Thanks R2R, let me know.
        Adam

        • Few comments on those numbers.

          For mortgage:
          – “Mortgage of 150k over 10yrs = $1500 per month”. Not really. You will be paying a lot more than that amount when you consider the interest on the mortgage over the years. There are plenty of tools online where you can calculate what kind of money you will be paying over the course of mortgage period.
          – “Rent from the condo per month =$1600 per month ($100 extra for maintenance if needed)”. What about vacancies? You will have to account for that if you are not able to find a tenant for a period of time. Also, Im not sure if $100 per month is considered enough for maintenance costs — I am not a landlord and it will depend from property to property and how much work will be needed.
          – “Overall – $50k and in 10 yrs it is now $200k with 10% dividend of $20k per year”. Arent you missing the point of paying your mortgage? Yes, your initial investment was $50K and you are earning income via rent, but you will also have higher expenses with the mortgage payments and property taxes, utility bills and what not. So, you will have to look at the cash flow of the overall property to crunch those numbers to see if it makes sense.

          To compare apples and apples, you may have to consider putting same kind of money into the REIT stocks on a monthly basis and see what kind of return you might see.

          Hope that helps
          R2R

          • Benji says:

            Hi R2R,
            Thanks again.
            Well i got the mortgage rate from mortgage calculator.org, and on 4% over 10 yrs.
            I also calculated the extra $100 as the rent is around $1700-$1750, but didnt want to put down the extras and complicate things.
            Also, the rental i am thinking of is normally vacant for 1-2 weeks maximum, and the maintenance fees on the past fews yrs are low as its a 2010 build and it also has a strata.
            I didnt understand what you meant by “Arent you missing the point of paying your mortgage?” as if i invest $50k into the property, rent it out for 10 yrs with lets say a few months vacant to have new tenants in and a few $k of maintenance, then it works out great for the long term as once the mortageg is paid off the income from rent would be $20k per year and the value of the property also, after i put in $50k deposit and maybe another $20k over the 10 yrs period for lost rent and maintenance.
            Also, the place i am in has no property taxes, and utility bills will be on the tenant.
            It just seems like a much bigger return for the long long term even though there will be a bit of extra money to put in and extra work as a landlord, but i just wanted to see if my figures were correct.
            Thanks
            Benji

  9. Robert Baillieul says:

    Hello Benji,

    Thanks for the comment. An apples-to-apples comparison of REITs vs. rentals is tough because every deal is different. No matter how great a property might be, it will be a shoddy investment if you overpay. It could be the greatest investment of all time at the right price. Not to mention your skill as a landlord, other market forces, etc. My point was just to illustrate there are other options to invest in real estate (and probably for most people a better option) than just rentals.

    A couple of points about your numbers, though.

    1) You’re assuming you can buy this property at a gross rent multiple of 10. Obviously it depends on the market, but this number looks low to me. In Vancouver/Toronto, condos seem to go for 20-25 gross rent. Even out east, the multiples tend to be in the mid-teens. Maybe it’s different in your local market.

    2) Your maintenance cost assumption looks optimistic (the industry standard is 2% of the property value). You would also want to deduct condo fees, property taxes, realtor commissions, transfer taxes, lawyer taxes, vacancies, missed rents, etc.

    3) What is the value of your time? When I see eye-popping returns from investment real estate, I never see people factor in the value of their time. The cost of property management should be included. I value my time anywhere from $50/hr to $100/hr. If you add that to your calculations, your returns will be much less impressive.

    4) And finally, there’s risk. Can you go a couple of months with no rents from your property if you have a vacancy or a bad tenant?

    Like I said, it’s hard to compare the two without a full discounted cash flow sitting in front of me. This is super duper high level.

    Rob

    • Benji says:

      Hi Rob,
      Thanks for the feedback.
      Yes i see your point, it does sound like a great investment and a safer option to stocks, but for me as im in my late 20s i wanted to get something to help me in 20 yrs so that i have this extra income every yr, after putting in $50k deposit and $20k extra for the end result of saying thanks to the tenants for buying my house. $200k value at the end of the term if i want to sell and $20k income from rent is a nice return.
      Can you tell me more about the gross rental when you said – “You’re assuming you can buy this property at a gross rent multiple of 10.”
      In regards to maintenance fees, i understand and would look to spend as you said.
      Condo fees, property taxes don’t occur when i am and the others would be extra costs as and when, but noting too dramatic i hope. Contingency of $20k after the $50k deposit.
      The value of my time will show in 10 yrs when the rental income is $20k a year for hopefully an additional 20yrs of rent.
      The rental of these condos are in demand and as soon as they come available they are rented within 1-2 weeks. There is always a list of 10 or so people wanting these units.
      But i understand, not every home buy is like i have stated and it wouldn’t be as easy or reliable as you say, and there would be a risk factor involved.
      Thanks Rob
      Benji

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