Most investors are terribly overweight local residential real estate. It has the potential to be a real problem.
I’m mostly referring to their principal residence, of course. If you have a million-dollar net worth consisting of a paid-off $500,000 house and $500,000 in stocks, your asset allocation to real estate is much too high. You’re essentially making a big bet on residential real estate in your city.
This is why many pundits tell folks to not include the value of their property in their net worth. Besides, your house costs money to maintain. And you’ll always have to pay the property tax or house insurance. This is why I argue housing is more of a consumption item, rather than an investment.
Some people take this a step further. They add a rental property or three on top of their principal residence. This investment is almost always in the form of a condo, which just adds to the concentration. If their city’s market ever takes a dive, watch out.
This is why I suggest investors put their cash to work in Canada’s best real estate investment trusts (REITs). An investment in a good REIT gives us instant diversification, both in different areas and into other asset classes.
Let’s take a closer look at one interesting REIT — a company that can generate a great deal of safe, passive income.
One thing I like about investing in the medical system is, folks are always going to keep getting sick. This is especially true these days, with poor diets and sedentary lifestyles leading to long-term health issues.
Here in Canada, there really isn’t a way to invest in this sector. Private hospitals exist up here, but they’re essentially a rounding error when compared to our massive socialized healthcare system. Canadians must look elsewhere for that exposure.
Medical Facilities (TSX:DR) is a way for investors to put their cash to work into hospitals in the United States. The company owns a controlling interest in five specialty surgical hospitals as well as seven ambulatory surgical centres. The specialty surgical hospitals offer various non-emergency procedures, while the ambulatory centres do less-serious types of surgery with a 24-hour-or-less recovery period.
In total, these hospitals generated US$431.6 million in revenue in 2018, which translated into US$73.4 million in operating income. The top line increased by 12% in 2018, thanks to a new partnership with MFC Nueterra.
There’s still plenty of growth potential going forward, too. The company recently announced it will, along with partners, develop a new ambulatory surgical centre just outside St. Louis. This facility should be open sometime in early 2020. And it still has all sorts of potential to acquire existing property.
Investors are getting an interesting combination of growth and an attractive yield. Medical Facilities stock currently yields an impressive 8.9%. Investors don’t have to worry about the distribution, either. The payout ratio in 2018 was a mere 71%. That’s below average for the whole sector.
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It doesn’t take a huge investment in Medical Facilities stock to turn it into a major cash cow.
You’d have to buy 10,638 shares to generate $1,000 each month from the investment. That seems like a lot, but remember, shares are currently trading under $13 each. That means you can get into the position for a hair over $135,000.
Perhaps $1,000 per month is a little out of your reach. No problem. An investment of $13,500 will generate $100 per month in passive income. Do that a few times, and you’ll be looking at serious money in no time.
But don’t delay. Shares are currently close to a 52-week low. This stock could shoot skyward at any time. It would still make a great passive-income choice at a higher price, but you’d be sacrificing some of that sweet yield.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns shares of MEDICAL FACILITIES CORP. The Motley Fool owns shares of MEDICAL FACILITIES CORP.