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)