How to be a landlord… without all the headaches

My wife and I are currently in the process of buying a house right off the beach here in Santa Barbara, California.

Besides the ocean view, one of the biggest attributes of this house is that it has a two-car garage on a separate level.

For about $20,000 I figure I can convert that garage into a legal rental unit that will produce about $20,000 A YEAR in extra income. (Yes, Santa Barbara rents are outrageous!)

Now, perhaps you’ve thought about becoming a landlord, too.

After all, owning a rental property comes with heaps of potential benefits.

You get steady cash flows that typically keep pace with inflation.

You can enjoy various tax benefits.

Plus, you have another level of diversification on top of stocks, bonds, and other traditional investments.

Of course, there are also lots of downsides.

Here are just a few:

Money: Even if you finance, you’ll still need a lot of cash to get started. For example, a $100,000 property could require $20,000 down. Toss in another $5,000 for closing costs, and you’ll have $25,000 tied up.

More Money: There will also be ongoing maintenance and repairs both inside and out. Insurance costs. Taxes. Maybe utilities. The list goes on and on.

Tenant Hassles: You’ll need to screen tenants, keep them happy, and evict them if they don’t follow the terms of the lease. Of course, you can hire a property manager to take the day-to-day responsibilities off your hands. But then that eats further into your profit margins.

Lack of Liquidity: Unlike stocks, bonds, and mutual funds, you don’t have much liquidity. It can take months to unload a house even in a strong market. And if prices decline, you may lose a chunk of principal for good.

The point is that owning a rental isn’t just a passive investment.

You can’t expect to buy properties, sit back, and let the money flow in.

Whether you have one property or ten, it’s a business.

You’re taking on a lot of responsibility, and it’s a concentrated bet, just like any other business startup.

Don’t want to deal with it?

No problem!

You can use Real Estate Investment Trusts to get lots of income … an instant portfolio of properties … and ongoing liquidity … without the landlord hassles.

Real estate investment trusts (REITs) are a special type of company that invest in different kinds of real estate or real estate related assets, including shopping centers, office buildings, hotels, self-storage facilities, and long-term care communities.

REITs do not pay corporate income tax, and to qualify for this tax break, the Internal Revenue Code requires that the company must pay 90% of its taxable income to shareholders every year.

It must also invest at least 75% of its total assets in real estate and generate at least 75% of its annual gross income from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property.

Some other benefits that REITs offer:

  • Liquidity — You can buy and sell them just like regular stocks.
  • Retirement ready — You can own them in your IRA.
  • Professionally managed — You don’t have to deal with upkeep or deadbeat tenants.
  • Diversified — Rather than buying a single property on your own, shares of a REIT generally represent ownership in many properties throughout the country.
  • Income focus — Dividends from a REIT can be easily reinvested to generate future returns or they can provide you with a steady income stream.

Examples of REITs

To give you an idea of the types of REITs available, here are three that invest in unique areas of the real estate world …

Sun Communities (SUI)

Ratty trailer parks are being replaced with upscale, gated communities of manufactured homes. And REITs that specialize in manufactured homes get most of their income by leasing the space for those homes. They also own the utilities, such as street lighting, and take care of the community property. The homeowners maintain the spaces they rent, as well as their homes.

The manufactured housing sector is a small, often ignored one. However, the strong demand for affordable housing is attracting home buyers … and investors.

Sun Communities (SUI) is a big player in this market. SUI owns and operates or has an interest in 348 manufactured housing and recreational vehicle communities located in 29 states throughout the U.S. and Ontario, Canada.

SUI pays a $2.68 annual dividend, which amounts to roughly 3% a year.

Public Storage (PSA)

Self-storage facilities rent space to people whose garages are overflowing with junk they can’t bear to part with it. But that’s not all …

They’re also for law firms, accounting firms, and other businesses that need climate-controlled units to keep records secure and accessible.

Self-storage facilities have become more upscale over the years, with well-lit parking lots and attractive facades. It would be easy to mistake many of them for office buildings!

Public Storage (PSA) is a leader in this sector with thousands of locations in the U.S. and Europe.

PSA pays an $8 dividend, which amounts to a 3.74% annual yield at current prices.

LTC Properties, Inc. (LTC)

Based on simple demographics, demand for high-end senior housing is poised to take off.

As Charles Bissell, an executive at commercial real estate services firm JLL, recently told National Real Estate Investor,

“It is a strong sector right now, and it really all goes back to the health of the economy and the health of the housing market. When seniors have the ability to sell their houses and generate significant proceeds from those sales, they are a lot more bullish about going into a luxury community.”

One of the REITs in this sector is LTC Properties, Inc. (LTC). The company operates more than 200 senior housing and health care properties across the U.S.

Based on the $2.28 annual dividend, the shares are currently yielding 4.85%.

Now, am I saying it’s the exact right time to buy any of these three particular REITs?

No.

I actually have a fourth REIT that I’m looking at recommending to subscribers of my new premium monthly service, The Rich Life Letter.

It specializes in another type of real estate that should greatly benefit from what’s happening behind the scenes in Washington right now.

But the overall point is that a well-diversified investment portfolio should always include some cash-gushing real estate … and REITs can give you that without any of the headaches I might experience renting out my garage.

Yours for a richer life,

Nilus Mattive

The Daily Reckoning