Unlike the 30-minute infomercials on at 2 a.m. touting the latest get-rich-quick schemes, real money in real estate is made by collecting rent and long-term gains.
Not only is property one of the most often cited sources of wealth creation, but a recent survey of U.S. millionaires by Morgan Stanley found the asset class to be the top pick in 2014 for alternative assets. A third of respondents reported plans to buy direct ownership this year, and 23% expected to invest in real estate investment trusts (REITs).
Not only does real estate provide long-term returns through appreciation and cash yield through rents, but direct ownership also carries a tax advantage through deduction of depreciation.
However, it often seems the best investments are reserved for the moneyed elites. Like access to private equity and hedge funds, you need pretty deep pockets to invest in real estate. Sure, you might be able to buy a duplex or two, but you will never be able to afford diversification across regions and property types without quite a few zeroes in your bank account.
Besides diversification, how many of us regular folks with 9-to-5 jobs have the time to manage rents, maintenance and all the other hassles that come with owning large-scale property?
Enter REITs, a favorite here at StreetAuthority. These firms hold and manage real estate properties and issue shares on the stock exchanges. If the firm passes at least 90% of profits to investors, it does not have to pay corporate income taxes, so it is an extremely tax-efficient way to manage assets. Without the millions to diversify across different property types and geographic locations, REITs are the best way for retail investors to get access to the market.
Most REITs pay dividends on a quarterly basis but there are a few that have made the commitment to return cash to shareholders every month. Some investors swear by monthly payers as a way to smooth out their income stream. I like the group because I can reinvest the dividends on a more frequent basis without having to wait for the end of the quarter. That means more months to compound returns -- and compounding is an investor's best friend.
Stocks may be up or down in any given year, but those consistent dividend payments can help stabilize returns in even the worst years. Three of my favorite monthly payers have consistently returned an equal-weighted 6% to 7% cash yield for almost a decade.
Realty Income (NYSE: O) paid its first dividend in 1970, even before it was a public company and hasn't missed one yet with 524 consecutive monthly payments. The company owns a massive portfolio of 3,800 properties, diversified across 47 industries and in 49 states. Most properties are rented under long-term leases to quality tenants, and the company has a 98% occupancy rate.
Leases are structured as triple-net, meaning that the tenant pays for property taxes, expenses and maintenance. The owner collects just the rent, and in this case distributes it to shareholders. Shares currently pay a 5.4% annual yield but may be due for an increase since the payout hasn't gone up in nine months.
Inland Real Estate Corp. (NYSE: IRC) owns a $2.8 billion portfolio of shopping centers and pays a 5.5% annual yield. The company owns or has an interest in 161 properties totaling 15 million square feet of retail space across the Midwest. More than three quarters of the portfolio's square footage is occupied by such necessities-based retailers as grocers and drug or discount stores. No single tenant accounts for more than 5% of square footage, and the company has a 94% occupancy rate. Inland Real Estate has paid 114 dividends since it began paying on a monthly basis in 2004.
LTC Properties (NYSE: LTC) owns a $1.3 billion portfolio of health care properties and pays a 5.4% annual dividend. The company has paid dividends on a monthly basis since 2005 with 109 consecutive payments, but has paid quarterly dividends as far back as 1992. Properties are located in 26 states, with half of LTC's assets in Texas, Ohio, Florida and New Jersey.
Besides being a strong monthly dividend play, LTC Properties is also a good bet on aging demographics. The company leases its properties primarily to long-term care and other health care facilities. With the growing demand on population aging and universal health care, the company may be able to book a higher occupancy rate and rent increases across its portfolio. Properties are leased out on a triple-net basis, reducing risks to management and expenses. The company does not report tenants by square footage leased but the portfolio is more concentrated than at the other two companies with seven long-term care companies accounting for over 5% of rent revenue.
Not only are these three REITs a great way to get diversified exposure to real estate and money in your account each month, but an equal-weighted portfolio of the three has outperformed the S&P 500 from 2005 through the end of 2013. On a $10,000 portfolio, monthly payments have averaged $55.87 over the nine-year period. While the shares lost value in three of the years, losses were not as bad as those seen for stocks in 2009, and dividend payments have helped to ease the pain of price volatility.
Risks to Consider: Investing in real estate through REITs is not without its risks. Since the shares trade like a stock, the price is going to fluctuate much more than would direct ownership in a property.
As a highly leveraged investment, real estate values can also be volatile when interest rates increase rapidly. Investors should look past short-term volatility and view REITs as lifetime investments.
Action to Take --> Mark Twain offered savvy investment advice when he said, "Buy land -- they ain't making any more of it." Real estate is one of the top investments passed down through generational wealth and one that you can truly hold forever. Monthly-paying REITs are a great way to even out the lumpy income from stocks and have done very well against the broader market.