Buy a REIT: The Easy Way to Collect Rental Income

Investing in a REIT is one of the easiest ways to become a “landlord” and collect rental income without expending very much effort.

| More on:
Pixelated acronym REIT made from cubes, mosaic pattern

Image source: Getty Images

Real estate is one of the most well-known and well-understood investment assets. Even people who don’t know anything about the stock market, commodities, funds, etc., might know the basic premise of how real estate investment works. But it’s not for everyone, and the chief barrier is the high cost.

But there is another reason. Managing real estate as a landlord requires you to take a more “active” part in your investment than many investors are comfortable with. And if you hire someone else to do it, the services will cut into your rental income.

REITs are a great and easy way to become a “landlord” with most of the upside and relatively few downsides. As a REIT investor, the dividend income will fall in your bank account more promptly and almost always on time far more easily than rental income would.

But the best part, perhaps, is that you can invest in real estate asset classes to which you might not have exposure as a real estate investor. Take healthcare properties as an example. They are a niche market within commercial real estate and based on how stable and evergreen the healthcare business is, they are also more reliable than many others.

One REIT that gives you exposure to this asset class is NorthWest Health Properties (TSX:NWH.UN).

The REIT

NWH has a portfolio comprising 190 income-producing properties worth about $8.3 billion and spread across three regions: the Americas, Europe, and Australia, where the bulk of the portfolio is concentrated (about 55%). The occupancy rate of 96.7% promises stable income, which in turn promises reliable dividends.

And the geographic diversification of the portfolio is not the only feather in NWH’s cap. The REIT also has long-term relationships with some of the most well-known healthcare providers in the world. The portfolio leans more towards hospitals and healthcare facilities, and about 39% of it comprises medical office buildings and life sciences.

The “rental” income

Let’s say you can pay for about 50% of a $600,000 condo in Toronto and get the rest of it financed. The rent you will most likely collect on that property will be barely enough to cover the mortgage payment for a 10-year fixed mortgage. You might start seeing a positive rental yield in due time, but it would be a whole decade before you can benefit from the full rental income.

Instead, if you invest the $300,000 (50% of the price) in NorthWest, the 6% dividend yield would result in a monthly income of about $1,500, which is more than the average rent for a one-bedroom apartment. It’s a rental income that you can start right away and doesn’t require any active participation in management from you.

Foolish takeaway

The REIT has sustained its dividend through the brutal payout ratio of 359% in 2018, and the payout ratio didn’t exceed 100% during 2020. This indicates the financial stability sustaining the dividends. You might not see any dividend growth with this dividend stock since the company hasn’t grown its dividends in the past five years, but you are likely to experience modest capital appreciation.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »