How I Collect Monthly Rental Income (Without Dealing with Tenants)
February 5, 2018
Where I’m Finding 7%+ Yields
Each month, I receive a rent check for a couple hundred bucks.
I’ve collected these payments for years. And each month, they get a little bigger.
In fact, these rent checks have become quite the little side income. I spend them on bills, groceries, or dinners out. If you save them up for a few months, they can even fund a nice vacation.
The best part? I never have to fix toilets, mow lawns, or deal with tenants. Aside from checking the numbers each month, the whole process works on autopilot.
I’m talking, of course, about my investments in real estate investment trusts (REITs). Simply put, REITs represent partnerships that buy properties, collect rent from tenants, and pass on the income to owners. Congress created these vehicles back in 1960 to allow everyday people own investment real estate.
Honestly, I’m shocked more investors haven’t heard of them. If you ask most people, the only way to invest in real estate is buying a rental property yourself. But for most folks (especially those of us who hate dealing with tenants), REITs serve as a better alternative for a few of reasons, detailed below.
Higher Yields: Most stocks only pay out a fraction of their profits to shareholders. REITs, in contrast, have to pay out almost all of their income by law. While the required percentage varies by situation, most partnerships have to pay out at least 90% of their earnings. For this reason, many trusts pay out yields ranging from five percent to even nine percent.
More Tax-Efficient: Dividend income from regular stocks get taxed twice. First, businesses pay a levy to “Uncle Sam” on profits. Second, you have to pay taxes on any income received as dividends. REITs, by comparison, don’t pay any corporate-level taxes.
A Lot Less Stress: Who wants to spend their golden years chasing down deadbeat tenants? Owning a rental property can become a full-time job, between mowing lawns, fixing toilets, and collecting security deposits. When you own a REIT, a professional management team handles all of the day-to-day operations. All you have to do is sit back and wait for the rent to get deposited.
Monthly Income: Most REITs collect rent from tenants on a monthly basis. For this reason, it only makes sense to pay unitholders on the same schedule. More frequent payments don’t have a major impact on your returns. However, monthly distributions do make it easier to sync your rental income with normal expenses. For those of us who depend on our portfolios to pay the bills, that can be a big convenience.
Better Assets: As individuals, most of us can only cough up enough dough to buy a condo or a single-family house. REITs allow ordinary investors to own some of the best real estate assets in the world, which we’d otherwise have no chance of ever owning. In my portfolio, for example, I own a piece of a grade-A office building in Europe, high-end malls in Toronto, and trophy assets in Manhattan.
Diversification: If you have a property and your only tenant can’t pay their bills, you have a big problem. A rental property represents a bet on a single street, in a single neighborhood, in a single city, in a single country. A portfolio of REITs, on the other hand, can have thousands of tenants across many property types. If there’s a downturn in one area, your income stream doesn’t dry up.
Better Returns: REITs allow you to partner with a professional management team. Their larger operations also allow for some economies of scale. This combination means REIT investors can earn better returns than buying real estate themselves.
Lower Portfolio Volatility: Stock prices tend to follow the business cycle. REIT returns, in contrast, tend to follow the longer real estate market cycle. That difference means REITs tend to “zig” when the stock market “zags,” reducing the ups and downs in your overall portfolio.
