I'm in the same boat: I despise the idea of dealing with tenants but I do like the idea of passive rental income from real estate.
So I've been investigating Real Estate Investment Trusts (REITs). It's basically like buying a mutual fund that invests in hundreds of different companies - you buy a stock in a REIT that invests in Commercial Property, Medical Properties, Residential Propertys, etc.... They derive their income from either rental payments or mortgage interest and they pay you a monthly/quarterly dividend.
by law a REIT must pay out 90% of taxable income to its shareholders.
Pros:
* similar to a stock, you buy shares, the REIT manages the day to day operations
* You can't be sued and your personal assets aren't at risk, your only risk is your investment
* They deal with all the headaches of managing properties, screening tenants, collecting payments
* Liquidity - these shares are traded on major exchanges and can be bought and sold as easily as regular stocks, if you're dissatisfied you can sell the stock and regain your principle or take a minor loss. Traditional real estate investments aren't liquid and it could take months or years to sell a property, all while you're still making mortgage payments and not collecting rent.
* Under law, they must pay out 90% of taxable income, most pay quarterly dividends but there are a few that pay monthly dividends.
* There are two ways to earn money: through dividend payments and stock value appreciation
* since they own multiple properties, they have maintenance agreements with contractors so they can get better pricing for repairs than an average guy that occasionally calls a plumber or roofer.
* REIT stock prices remain fairly stable - they don't go up by much and they don't decrease by much.
Cons:
* Dividends are taxed at ordinary rates, not corporate rates
* If the company incurs a loss, the loss does not pass onto the shareholder and you can't take that loss as a deduction
* They could screw around with expenses by paying outrages salaries to their execs and employees, thus reducing their taxable income, thus reducing the amount that they have to pay out to their shareholders
* REITs are highly sensitive to interest rate fluctuations, so if interest rates go up, the value of your stock goes down and also the dividends might go down due to increased interest expense incurred by the REIT.
* The value of the stock appreciates VERY slowly since they are required to pay out 90% of their taxable income so they only have 10% left to expand the operation.
* to expand the operation, they generally rely on bank loans since they only retain 10% of earnings, and bank loans are sensitive to interest rate fluctuations which could affect dividend payout (see above).
People often ask: "Okay, if you've got $X to invest in REIT stock, why not just buy a property and hire a management company? You can make a greater monthly return."
Fair question.... the management company deals with screening tenants and collecting payments. They might also have maintenance contracts with local contractors and can get better pricing.... but I would still be the one to foot the bill for the maintenance costs....and I could still be the one to get sued (for whatever reason)... and if the tenants just decide to bail out and not pay rent, I would still be the one to have to file a lawsuit to get them evicted...
Also, buying a rental property means I would have to take out a loan, and if maintenance costs exceed the monthly rental payments, I'd be losing money since I'm the one that's responsible for making the mortgage payment to the bank...
Taking all this into consideration, the idea of rental properties just doesn't appeal to me.
I'm currently looking at some REITs that pay monthly dividends... so far I've seen $0.18/share for some REITs... yeah, I know, it's pocket change, but this particular REIT I'm looking at consistently pays $0.18/share and it's share price remains relatively stable so I wouldn't lose too much principle should I decide to sell the shares.
Personally, I'm more interested in REITs that invest in residential properties and medical properties since these days people aren't buying homes anymore and are renting.... and medical properties (hospitals, clinics, doctor's offices) tend to be more stable than commercial properties and pay rent on time-- as you might be aware the retail industry is tanking in this country and manufacturing jobs are being shipped overseas, so commercial properties don't seem too promising to me.
Just some food for thought.
