How I am earning rental income without buying properties


For a well balanced diversified portfolio, investment in real estate is often necessary. However upfront high cost of purchase and maintenance of real estate properties are not that convenient for everyone. Also real estates are not very liquid class of asset in case I need to sell for some emergency need. Considering all these, currently my house is the only typical real estate asset I own.

On the other hand, I also don't want to be left out from owning some income generating real estate properties. So I started investing in REIT (Real Estate In vestment Trust) companies. These companies raise capital by selling stocks and  then invest in different type of real estate assets like Retail store, Office building, Hospitals, Hotels etc. The income generated from rent and other sources, are paid back to share holders as dividends. By rule, REIT companies are required to pay back about 90% of income as dividends to shareholders. So REIT s are quite a good source of  dividend income. Once dividend shows up in my account, I feel like earning rental income without being a landlord :) I guess its no fun to chase a rogue tenant for unpaid rent or get a call to fix broken toilet middle of the night:)

Another flexibility of REITs is that it can be bought and sold just like a stock anytime I need to.

Like any investment, I check couple of points to see if the REIT performance and owned assets are dependable. For an example, these days conventional brick and mortar retails stores are in decline. So I am trying to avoid REITs that are heavily invested in this sector. Also I check the associated management fee and other costs that may reduce available profit to be disbursed as dividends.

At present,  most of my REIT investments are through Vanguard Real State ETF (VNQ).

It owns about 186 REIT holding companies in its portfolio. Currently it provides about 3.5% dividend yield with expense ratio of  only 0.12%. So that means for every $1000 investment, I am receiving about $35 as dividend while paying $1.2 as management fee. Not a bad deal I guess!!

This ETF was first issued in 2004 and currently have net asset of about $70 Billion. Despite the real estate crash in 2008, it average annual return is handsome 9.16%. The price I last checked was at $91 which I believe is bit overvalued. But again, everything is bit overvalued at this longest running bull market, I guess:(

Here are sector wise allocations and list of top ten holding REITs. Overall seems like this is well diversified across different types of real estate properties.

Disclaimer: This article shows my personal opinion. This is no way professional financial advice. You may seek professional advice or conduct own research before investment.

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