If you want to create a passive-income stream, one of the most recommended methods is by investing in real estate. Those recommending this method state that after the initial purchase, you can simply and “passively” collect income from rent for seemingly years. Many of these recommendations also come from those who then believe that the stock market is far too risky compared to real estate.
But news flash: real estate has plenty of problems. The biggest? That “easy” initial investment.
I’m not sure if you’ve purchased a house recently, but despite lower interest rates, housing prices are sky high. So, that rent all of a sudden seems pretty far off, especially since you’ll then have to convince your new tenants that you can indeed raise the monthly rent.
Then there’s the property itself. Unless you’re looking after it, which is certainly not passive, you’ll likely hire a management company. Then there are taxes to consider on top of that, insurance, and paying to upgrade the property every few years. The list goes on! Suddenly that passive-income stream seems not even slightly passive at all.
Luckily, there is a far better way.
Don’t give up on real estate
Real estate is still a great way to invest, but you can combine the stock market with real estate growth instead. Real estate investment trusts (REITs) pay out 90% of income after taxes to shareholders, and this usually comes in the form of dividends. This provides a relatively stable way to continue seeing dividends coming in, without worrying whether your renters are going to pay you or not. Instead, they have to pay this third party!
And what’s better is you don’t have to make a significant initial investment. In fact, if all you have is $50, you can start today! But if you’re, say, a 30-year-old looking to create a passive-income stream for when you retire, you likely want to eventually reach more than that So, let’s look at a strong option to consider, and what you would need to invest to make cash every day of your life.
An essential option
During the pandemic, many REITs floundered. Either the bad economy left renters unable to pay, or retail went under because of the lockdowns. But there were a few areas that didn’t just remain strong; they thrived. That included healthcare REITs like NorthWest Healthcare Property (TSX:NWH.UN).
NorthWest owns healthcare properties around the world, ranging from offices to hospitals and everything in between. Rent continued to come in during the pandemic, as it was deemed an essential service for obvious reasons. Not only did rent remain stable, but NorthWest was able to increase its number of properties as well. NorthWest recently added properties in the Netherlands to its portfolio as well as an Australian healthcare REIT.
While shares haven’t exploded despite this strength, the stock is still up 21% in the last year. It’s therefore still affordable with a valuable P/E ratio of 9.4 and EV/EBITDA of 18.6. And then, of course, there’s the dividend yield at 6.05% as of writing.
Making that passive income
If you’re 30 and want to retire by 70, let’s look at the performance of NorthWest. It’s not old but has grown at a compound annual growth rate of 14.75% over the last five years. Let’s make that a conservative 10% to be safe. The dividend, meanwhile, has remained stable in that time, so we’ll even assume that remains the case in the years to come.
Let’s say you can afford to invest $6,000 each year for the next 40 years. In that time, if you add $6,000 each and every year, reinvesting your dividends, by the end of 40 years, you will have an insanely high portfolio worth $16.7 million at these rates! That would mean by 40 years, you would have 26,177 shares, bringing in annual dividends of $869,238! That would mean $2,381 per day for the rest of your life! Even at a decade from now, that would bring in $7,759 in dividends or $21.25 per day!
Now, of course, this is as an example. Shares could drop in that time due to a variety of factors, and dividends may indeed remain stable instead. But this just goes to show that reinvesting in dividends can do wonders for your retirement portfolio.