Several years ago, one of my relatives sold his business for several million dollars and attended FreedomFest to decide what to do with his cash. He and his wife attended several sessions led by investment experts on a variety of choices — income and growth stocks, offshore investing, venture capital (pre-initial public offering private placements) and real estate.
They told me that they had never owned bonds or stocks (other than their own company) and felt uncomfortable investing in them. They decided to stick with “what we know best” — commercial and residential real estate. They had invested in various rental properties over the decades and decided to stick with this strategy. They kept the properties they owned, paid off their mortgages and lived off the income stream (earning tax advantages to boot). They used the remaining funds to acquire more properties — a strip mall, a car wash, an event center, storage units, resort condos, luxury homes, mountain cabins and lodges. The husband manages the properties and the wife does the paperwork, which keeps them plenty busy.
He told me, “Most properties are paid for, producing income and growing in value — partly because we improve, upgrade and maintain our properties impeccably.”
Real Estate Investment Trusts — the Stock Market’s Alternative
Like any investment, there is a downside to investing in rental properties directly — the paperwork, repairs and upkeep, bad tenants who suddenly stop paying their rent, choosing the wrong location, changing trends, dealing with government regulations and taxes, potential lawsuits and an illiquid market. You may have to wait months if not years to sell your property in a down market.
The stock market provides a clear alternative — real estate investment trusts (REITs). All you do is invest in these publicly-traded trusts and sit back and receive rental income, usually paid every quarter, from a diversified portfolio of commercial or residential properties. No paperwork, no worries about repairs, upkeep, phone calls in the middle of the night, lawsuits, or dealing with government agents.
There are dozens of income-producing REITs to choose from, many of which pay an above-average yield of 5% or more and have adopted a rising dividend policy. We recommend one of them in Forecasts & Strategies. That one invests in assisted-living facilities, a growth industry. It currently pays a dividend of 55 cents per share every three months for an average yield of 6.1%. It has increased its dividend 10 times in a row.
Moreover, if the properties rise in value, you benefit from a rising stock price and capital gains over time. Sometimes there are tax advantages — part of the quarterly distributions may be treated as long-term capital gains. And you have liquidity. You can sell your investment at any time.
What’s not to like? Well, there are some downsides — if the REIT is mismanaged, the trust may cut or even suspend its dividend and the stock price can drop accordingly. REITs also are subject to the ups and downs of the marketplace. If you can hold on and collect your dividend checks until the market recovers, you are okay. But if you have to sell during a bear market, you could lose money.
You also can diversify into other income-producing stocks, such as energy firms, private equity, muni bonds, utilities and business development companies — see the latest issue of Forecasts & Strategies. The key is to find quality investment companies that pay high and rising dividends.
The choice is yours — be an active investor in your own rental properties, or a passive investor in REITs and other dividend-paying stocks. Both have their pros and cons.
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