Top REITs Pay Rental Income Without Dealing With Tenants
If you have ever bought a rental property, then you probably know the truth about these so-called “passive” income investments: they can present big headaches.
Owning a rental property means spending your weekends mowing lawns, unclogging toilets, and screening potential tenants. Never mind living with the fear that some deadbeat will trash your investment or skip rent payments.
Worse, rental properties require a big investment up front. You’ll have to cough up at least $20,000 for a down payment on even a modest condo. Plus, you need to keep some cash on hand for repairs, equipment, and other expenses.
But there’s a workaround.
Investors can earn a lucrative side income as an “online landlord” through real estate investment trusts (REITs). These partnerships buy properties and rent them out to tenants. Better still, a professional management team handles all the day-to-day operations that come with running the business.
That creates a stream of cash flow for investors. Each month, these REITs deposit checks into investors’ brokerage accounts. This can grow into quite the passive income stream.
Today, investors have dozens of REITs to choose from. There are partnerships in every aspect of the real estate business, from hotels and apartments to malls and warehouses.
Of course, you need to do your due diligence on each specific trust. They vary wildly across the sector, in both quality and income potential. Investors also have to balance upfront yields with long-term growth prospects.
To help get you started with these income investments, I have highlighted three of my favorite REITs.
To be clear, this doesn’t represent a list of “buy” recommendations. But the following companies do present a great starting point for research.
STORE Capital Corp
It’s one of my favorite ways to invest in commercial real estate. And apparently legendary investor Warren Buffett agrees.
STORE Capital Corp (NYSE:STOR) is pretty simple to wrap your head around. Management buys properties from established businesses, fronting them the cash they need to expand their operations. In exchange, these companies agree to lease the buildings back, paying steady rent checks each month. Moreover, renters, not STORE Capital, have to pay all of the ongoing costs to maintain the buildings, such as repairs, renovations, and property taxes.
Needless to say, this is a profitable arrangement. Buildings come with a happy tenant already leasing the property. And almost every dollar that STORE Capital collects in rental income flows straight to the bottom line. That explains why STOR units have doubled in value since the partnership’s initial public offering in 2014.
And Warren Buffett, it seems, has taken notice. Over the past few years, his holding company, Berkshire Hathaway Inc. (NYSE:BRK.B), has quietly accumulated 18.6 million STORE Capital units. At current prices, the value of his stake now tops $696.6 million. (Source: “Store Capital Corp (STOR) – Hedge Fund Holdings,” Insider Monkey, last accessed February 14, 2020.)
Income hunters might be wise to follow suit.
American Tower Corp
Regular Income Investors readers know we’re big fans of “irreplaceable assets.” These are difficult-to-replicate or one-of-a-kind properties. The position allows property owners to raise rents year after year. Moreover, they always enjoy exceptionally high demand from investors.
American Tower Corp (NYSE:AMT) provides a case in point. Over the past two decades, management has assembled a portfolio of cell phone towers, totaling more than 171,000 broadcasting sites worldwide. Executives then rent these towers out to cell phone carriers in exchange for monthly rental income. (Source: “Company,” American Tower Corp, last accessed February 14, 2020.)
Building a new broadcasting site presents a challenge. Local residents don’t want to see big, ugly towers put up in their neighborhoods. In most cases, those barriers to entry stop any new companies in their tracks.
Incumbents, however, love those barriers to entry. Without the fear of rivals biting into their business, companies like American Tower Corp have the freedom to jack up their rents year after year. A single tower site with three or more tenants can generate $0.21 in annual profit on every dollar the partnership has invested.
For AMT unitholders, that has translated into outstanding returns. Over the past 10 years, American Tower units have posted a total gain, including distributions, of 596%. And during that period, the partnership’s payout has nearly tripled.
Annaly Capital Management
While property values have surged over the past decade, the best income investments might actually be in financing real estate deals.
Take Annaly Capital Management, Inc. (NYSE:NLY), for instance. The trust invests most of its portfolio in government-guaranteed mortgages from entities like Fannie Mae and Freddie Mac. Management then pays out the mortgage payments to investors, funding a dividend yield that’s now about 10%.
It’s a smart business for Annaly. Mortgage payments roll in like clockwork each month. And if a homeowner defaults on their loan, the U.S. government will reimburse investors. In other words, taxpayers, not Annaly unitholders, take most of the credit risk.
To be clear, Annaly’s higher yield comes with higher risk. To fund its mortgage purchases, management has to borrow money from lenders. That leaves the business exposed to a sharp rise in interest rates, which can bite into cash flow from time to time.
Annaly executives, however, have successfully navigated the ups and downs of the real estate business. Since going public in late 1997, NLY units have posted a 579% total return.