Adding Real Estate To My Passive Income Flows

avatar By: IS
Date posted: 10.16.2012 (4:00 am) | Write a Comment  (6 Comments)

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Over the past few months, I’ve discussed my passive income objectives and it’s no secret that having solid investment accounts are a huge part of my strategy. I’ve been updating my dividend investing in my Ultimate Sustainable Dividend Portfolio updates and have also linked to some information regarding ETF investing. Those are the core of my long term investment income strategy. I do however also plan to accumulate passive income from other areas and real estate seems like an obvious place to look into. I’m hoping a John D Wood letting agent in Clapham can help me find some investment properties. I did want to take a better look into the different methods that could be used as well as the pros and cons. I do not have that much experience so I’d certainly love to hear your thoughts:

Buying REIT’s

What is a REIT? Basically, it’s a stock of a company that buys and then manages real estate investments.

Pros:

-Very little work required, you could argue that this would be included in a dividend portfolio but I do consider real estate to be in a class of its own
-Very diversified: buying a REIT means getting exposure to real estate in many different buildings, regions and countries in some cases
-Requires very little capital and little to no leverage
-Very liquid (you can get in and out within a moment’s notice)

Cons:

-Fees: There are a lot of additional fees involved when you hold a REIT as the company has staff, legal fees, etc.
-No control over the investment: Basically, when you buy a REIT, you are buying based on the historical returns for the most part because trying to know what they hold, how well their investments should do, etc becomes very tricky.

My partner and I do have a site dedicated to Canadian REIT’s with a free ebook that you might want to check out

Buying Physical Real Estate On My Own

Another option is one that many tend to go for. They simply go ahead, buy a house, condo or another type of real estate property in an attempt to rent it out and perhaps sell it at some point. Many ended up getting burned, especially in the US in the past few years as prices crashed. I would personally only go ahead by incorporating myself in order to simplify taxes, accounting, etc.

Pros:

-No overhead
-Would be incredibly interesting

Cons:

-Would have a TON to learn
-I’m not very good with repairing stuff and lack the time so would likely need to hire someone to help
-No diversification as I could only afford 1-2 properties that would likely be near where I live
-Leverage would be necessary

Buying Physical Real Estate With Partner (s)

This is clearly an interesting option for me as I’ve had a lot of success partnering up with Mike for my online venture.

Pros:

-You can share risk, knowledge, experience and complement each other
-Get more perspective and critical thinking when making those investment decisions

Cons:

-Finding the right partner is incredibly difficult and things can go terribly wrong if you don’t have the right one, it can lead to a messy “business divorce”
-Need to setup a legal entity (it becomes way too messy if not)

Clearly, I’m fortunate to already have the best partner and the next logical step would be to start buying some real estate. We’ve written about how buying websites is like buying real estate but with more attractive pricing. That is still true although the difference has been diminishing over time. We also both like the idea of adding different sources of passive income to protect ourselves against changes on the web, etc. It just seems like a logical next step.

The Best Option?

Obviously, every person would have a different way of getting exposure to real estate and I don’t think there is one wrong answer. Personally, there is no doubt that moving to the 3rd option makes the most sense to me and it will certainly be a lengthy (but hopefully very interesting!!) process!

What Is Next

From my partner and I’s perspective, we are in a debt repayment mode right now so that will be the first condition to be met. We will be working on:

-Establishing a new capital structure
-Getting better info about the process
-Getting a better feel for the markets, pricing, etc. This critical given how prices have moved in recent months
-Building an action plan

Are any of you active in the real estate or REIT market? I’d love to hear more about it!

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6 Comments

  1. Comment by Cash Flow Mantra — October 16, 2012 @ 7:23 am
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    I own several single family homes and half of a commercial building. My goal is not to make a lot of money on the process, but to have tenants pay the mortgages and collect the cash once paid off. It is like a retirement account for me.

  2. Comment by Amit — October 16, 2012 @ 11:49 am
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    REITs or any income producing securities are not a great investment currently. Since, interest rates are so low.

    Alternative to REITs are the preferreds that trade on REITs. Although, the prices are at historical highs and yields are at historical lows, they are safer than REITs in terms of dividends.
    Also, there are convertible preferreds which are a better way to go because it gives you upside on the stock price.

    A REIT I believe is undervalued is CWH. However, it is a bit risky with its poor management. I have a options strategy on that REIT that I believes gives a good risk/reward ratio. http://hypezero.co/undervalued-reit-cwh/

  3. Comment by IS — October 16, 2012 @ 7:35 pm
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    @Cash Flow Mantra – That is great, how did you end up getting started? I’ll digg through your blog, hopefully find something:) Do you have someone working for you to help on repairs, etc?

  4. Comment by IS — October 16, 2012 @ 7:36 pm
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    @Amit – Interesting ideas although options seems like a shorter term play on the REIT value rather than a long term passive income

  5. Comment by Amit — October 16, 2012 @ 7:45 pm
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    Yes, the options strategy is a short term play (6 months). There are two investments I think are good for income investing.

    AFF, AVF (AIG Junior Debentures)
    Royal Bank of Scotland Preferreds are interesting as wel. Although they have moved up quite a bit.

    I will post an article soon where I examine some income investing stocks that I am tracking.

  6. Comment by Martin — October 19, 2012 @ 10:14 pm
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    The beauty of buying a home is that you can learn everything as you go. I was forced this summer to learn how to install a condo light lol!

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