Real Estate Without the Landlord Headache

I’ll admit I’m more than a little jaded when it comes to real estate. Last week, I sold a house that I owned in Florida with an ex. The lesson learned is well known: don’t buy a house with someone you’re not married to. This wasn’t the first time I owned property.

I bought a house in Baltimore in 2012. Three years later, I got relocated to Florida. Renting it seemed like a good idea until I got wind that my tenant had let it turn into the seedy house of the neighborhood.

I’m in no hurry to try my luck at owning property anytime soon. But for most people, home ownership is a must. If you plan to stay in one place for a while, it makes sense to store a piece of your net worth in this tangible and useful asset.

Housing prices have started to cool from their all-time highs.

And mortgage rates have declined from their recent highs. Inventory, especially in major metro areas, is up double digits year over year. If you’re sitting on the sideline, a buying opportunity might be forming as we speak.

For me, I’ll keep my real estate exposure inside my brokerage account.

Skip the Landlord Headaches

REITs (real estate investment trusts) were created in the Cigar Excise Tax Extension of 1960. They were intended as a way for individual investors to gain access to income-generating real estate. It also created another way for these projects to raise capital.

To qualify as a REIT it must:

• Earn at least 75% of gross income from rents, mortgage interest, or real estate sales

• Distribute at least 90% of its annual taxable income to shareholders as dividends

• Have at least 100 shareholders with no more than 50% being held by 5 or fewer investors

Most REITs own and operate income-producing real estate, basically a de facto landlord. Mortgage REITs (mREITs), however, obtain or issue mortgages or mortgage-backed securities.

I prefer REITs that act like landlords because they hold the physical property as an asset. I also like REITs that have well-known businesses as clients.

You can find REITs across every sector of the real estate industry: residential, office, industrial, hotel/hospitality, and healthcare are some of the most popular.

Self-storage companies like CubeSmart (CUBE) and Public Storage (PSA) are REITs. You can even find niche specialty REITs that focus on areas such as data centers, timber, casinos/gaming, or cannabis.

It’s not as simple as asking if real estate is a good investment. In practice, there are many ways you can gain exposure without the hassle of owning the physical property yourself. 

Where’s the Opportunity

Let’s start with what to avoid—retail REITs. I would steer clear of these for at least the next year. As I said two weeks ago, we’re seeing a shift in consumer spending patterns that I think will be the route to post-COVID normalization. This shift will take time to trickle through to the shopping centers and turn into dividend income for REIT investors.

Instead, I really like industrial and experiential real estate.

Industrial real estate includes properties for manufacturing, R&D facilities, warehouses, and distribution centers. Some of these REITs also include data centers.

My top pick right now is STAG Industrial (STAG).

It manages 119.2 million square feet in 41 states. Its tenants include giants like Amazon and FedEx. The global logistics market is still rapidly expanding supported by e-commerce and tech, making industrial real estate a good investment for years to come.

STAG recently changed its dividend frequency to quarterly from monthly. This change has caused some confusion, and you could see inaccurate dividend and yield reporting depending on the source. Its April payment will be $0.3875 per share for an annualized yield of 4% at current prices.

Experiential real estate includes casinos, golf courses, bowling alleys—essentially all the activities consumers spend money on for enjoyment. Over the last five years, several studies have showed that buying experiences can be more satisfying than buying physical stuff.

My favorite REIT in the experiential business is VICI Properties (VICI).

It owns over 650 acres along the Las Vegas strip, numerous casinos across the US and Canada, golf courses, and bowling alleys. It rents to big name companies such as Great Wolf Lodge, MGM Resorts, Century Casinos, and Bowlero.

VICI pays $0.45 per quarter for an annualized yield of 6.1% at current prices.

Don’t get me wrong, I am not against owning a home. And I understand the opportunity for income with rental properties. It’s just not for me. Instead, I always have a few solid REITs in my dividend toolbox.

For more income, now and in the future,

Kelly Green