You and I know that owning a car is akin to owning a money pit. You dutifully throw dollar after hard-earned dollar at a hunk of metal and the right to drive it around is your only return.
You pay tens of thousands of dollars to buy it. You fill it with thousands of dollars’ worth of gas. You pay even more for routine maintenance, like oil changes, and completely unexpected (and always ill-timed) breakdowns. And you pay your insurance company monthly to protect your “investment.”
“A new car is the worst investment you’ll ever make, son,” my dad used to mutter each time he bought one. “It’s worth practically nothing the minute you drive it off the lot.”
Today, a testament to the economic pinch many feel, resourceful car owners and companies alike have found a way to offset the full cost of owning a car. They’re renting out their wheels, to strangers, in exchange for $15 an hour, or $75 a day.
Apparently, one guy earns $700 per month renting his BMW 5-series this way.
Risky? Maybe. But it sure beats draining the full $50,000, or $500 a month, in an asset that loses 25% of its value in 12 months and 50% over four years. Ouch! Why not cover at least part of the expense by taking in some rental income? After all, resourceful property owners have done the same thing for all of time. I’m not talking about the fast-money real estate flippers who had their heyday in the early 2000s. I’m talking about good old-fashioned landlords.
Rental Income: The Gift that Keeps on Giving
Landlords, unlike car owners and stock investors, earn investment returns through monthly income from tenants. As long as the space they own is occupied, the income payments roll in, month after month after month.
Yet, being a landlord is no walk in the park. You have the same hassles and expenses car owners curse: maintenance costs and unexpected repairs.
Besides, the barrier to entry is high. Rental properties are many times more expensive than cars, so to be an income-collecting landlord you must first have deep pockets, or the ability to convince a banker to give you a huge loan.
And then there’s the risk you’ll end up being a lousy landlord. Maybe you can’t find regular tenants, or can’t control your costs. And if you get stuck with a property no one wants to buy, you’ll find yourself locked into an investment you don’t want, can’t afford and can’t get rid of. It’s awful. You’ll wish you’d just bought a car instead.
With all that said, how could I say landlords have found a better way? Well, they have. They enjoy steady streams of monthly income, instead of simply hoping market prices will rise. Still, it’s a lot of work.
For the average investor wanting to dip his toe in the real estate market, there’s a better way still. In fact, right now, it’s the best way to profit from income-producing real estate investments.
Simply invest in real estate investments trusts, or REITs.
4 Reasons to Own REITs
Owning REITs is a little like owning real estate and a little like owning stocks. Only you get all the advantages of these assets, while minimizing the drawbacks. Here are four reasons why REITs deserve a spot in your investment portfolio…
- Ease of Ownership. Owning a rental property isn’t easy. Owning a REIT is. They trade just like stocks, you can buy today and sell tomorrow. Liquid trading in REITs ensures you won’t get stuck holding a $200,000 property you don’t want. Plus, while you may need to cough up the full $200,000 to buy a property, you can start investing in REITs with as little as $100.
- Buy low and sell high. REITs, just like real estate and stocks, have the potential to appreciate over time. Since 2000, while the S&P 500 appreciated 21%, many REITs increased in value much more. AMT, a diversified REIT gained107%. The healthcare REIT I told Boom & Bust subscribers about in May 2012, gained 317%.
- Passive Income. In exchange for favorable tax treatment, the IRS requires REITs to distribute to shareholders at least 90% of their taxable income. That means shareholders regularly receive cash distributions. These payouts add several percentage points of income to your bottom line. On average, office REITs currently pay 4.2% in annual yield, while healthcare REITs pay 4.8%, and residential REITs pay 7.1%.
- Diversification. Most investors hear diversification and think “a mix of stocks and bonds.” Yet these asset classes are more correlated than most realize. Investing in real estate, through REITs, is a great way to further diversify a traditional stocks/bonds portfolio. As these assets tend to peak and drawdown at different times, you can expect a smoother ride because you’ll have spread your investment dollars across more asset classes.
That’s why income-producing investments, including REITs, have been a core focus of my investment philosophy. The Boom & Bust model portfolio reflects this theme: I recommended an apartment REIT to subscribers back in June 2011 and that healthcare facilities REIT I mentioned above in May 2012.
Since then, we’ve collected more than $3.39 per share in “rental” income. That’s the equivalent of an average annual yield of 6.5%. Add this income to the gains we’ve earned through appreciation – more than 60% on our healthcare REIT – and it becomes obvious why REITs are a must-have in your portfolio.
Plus we’ve earned these gains without fixing a single leaky air conditioner, hounding a single deadbeat tenant, or making a single call to a property insurance company.
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