Investment Income: How to Make the U.S. Government Pay You a 7% Yield
November 14, 2019
Earn Steady Investment Income From “Uncle Sam”
Each year, it seems like politicians find a new way to take our hard-earned money: income tax, sales tax, property tax, investment income tax, etc. When it comes to picking the pockets of ordinary Americans, no one does a better job than the U.S. government.
So, wouldn’t it be nice to have “Uncle Sam” pay you for a change?
I know what you’re thinking, “Rob, the government takes half our paychecks. They’re not in the business of just mailing out checks to regular people.”
Actually, one little-known opportunity allows regular people to earn investment income from the U.S. government. These businesses pay yields as high as seven percent. And for those getting started now, they can collect their first check in just a few weeks.
Let me explain.
Each year, the U.S. General Services Administration (GSA) spends roughly $66.0 billion on goods and services needed to keep the nation’s bureaucracy humming. Their biggest expense: real estate. Rather than buying buildings itself, the federal government often opts to rent from private-sector landlords. This makes Uncle Sam one of the country’s largest renters.
Several publicly traded investment trusts have cashed in on this opportunity. Three of them are Office Properties Income Trust (NASDAQ:OPI), Easterly Government Properties Inc (NYSE:DEA), and Corporate Office Properties Trust (NYSE:OFC).
Over the past few years, these partnerships have leased out thousands of office buildings to the government nationwide. As it turns out, renting property to the feds is good business—far better, in fact, than leasing out apartment buildings to the Average Joe renter.
You couldn’t ask for a better tenant, to begin with. The government tends to pay its bills on time. And agencies like the U.S. Department of Veterans Affairs, U.S. Customs and Border Protection, and the Internal Revenue Service will never “go out of business.”
Moreover, government departments like to sign quite long leases. The typical lease terms usually come in between 10 and 20 years. And in most cases, these contracts come with an extension option for an additional five to 10 years.
In other words, landlords can literally circle the dates decades in advance for when they’ll get paid. They have created a stream of investment income that keeps coming in monthly as if on automatic pilot.
But here’s the best part: because few landlords can navigate the government’s complicated bidding process, these rental contracts can be quite lucrative.
In the real estate business, analysts often use a metric called the “cap rate.” Simply put, this metric takes a building’s annual operating profit divided by the property’s total value. It provides a rough proxy for investment returns.
Cap rates on typical government lease deals come in between five and eight percent per year. Those returns are comparable to residential and commercial properties, but with a far lower chance of the tenants skipping payments.
Landlords to the government boost their returns further through annual rent hikes baked right into the contracts. These lease agreements also often come with inflation adjustments and property tax included. So if either of these factors get out of line, their profits are safe.
For unitholders, this has created quite a stream of investment income.
The largest public government landlords pay distribution yields in the mid-single-digits. Acquisitions, rent hikes, and cost cuts have allowed some of these firms to boost their payouts over time.
The Largest Government Landlords
| Company Name | Market Cap | Yield |
| Office Properties Income Trust | $1.5 Billion | 6.9% |
| Easterly Government Properties Inc | $1.7 Billion | 4.6% |
| Corporate Office Properties Trust | $3.3 Billion | 3.8% |
(Source: Google Finance, last accessed November 13, 2019.)
Granted, you can’t call real estate investment trusts sure things—even the ones that own government properties.
These partnerships compete directly with fixed-income securities for capital. If interest rates rise, investors will swap out of these names for safer returns in the bond market.
Poor management can also bite into returns. If executives overpay for acquisitions or take on too much debt, unitholders will pay the price.
That said, this quiet real estate sector represents a profitable niche. If you’re looking for a safe place to earn investment income, how about making the U.S. government pay you a yield of up to seven percent a year?
