How I like to invest for Real Estate Income

This is a follow-on article from another I wrote called Why I Like Investing in Self Storage

The more I scroll around and listen to investors I tend to catch on to trends. One of the recent trends of the last few years has been around Passive Income Investing. It seems that everyone wants to have that extra income that magically appears in their portfolios every month on the spot religiously. I recently had a conversation with a young man who expressed this ideal. The idea being that he would like for his “day job” to provide the capital to not only pay his household bills and support his family, but any extra would go to investing in real estate that would allow him to have passive income. His plan was to buy another home and then rent the one he was currently living in. Other ideas I have heard were selling a business to invest in self-storage properties. I know of a third who wanted to sell some investments and buy into multi family. I think that the end goal of all three was the same but thought about differently. They want to have an investment that pays them monthly income. That income would then go to paying the bills along with the earned income from employment. After several years, I am thinking that they think that the loan needed for the second real estate investment would be paid off and then they are fully netting the rent. Hopefully, the underlying real estate would also have risen in value, thus making the total investment return quite lucrative. Sounds easy doesn’t it.

The real cost of real estate

I do not think that real estate investing is “easy”. Like any successful venture it requires a lot of due diligence as well as knowing the market better than others. This idea that people can buy and rent worthy real estate and start making a killing may be great marketing on late night infomercials, however, I think the reality is quite different. I recently posted an article on insurance costs and why they continue to rise. So far, this trend does not look to be slowing down. Same for taxes. We all know the expression about the two things in life we can count on, right? What about the other costs? Obviously, all building structures need repair on a regular basis. We just witnessed here in the Houston area another round of storms that caused damage that we are still cleaning up from. This costs money. The annual freezes, water damage, wind damage...it adds up. If you are a true “do it yourself’er” real estate investor, my hat is off to you. I still would like to know how much time do you spend on fixing up your not so passive investment?

Triple-Net Lease

Triple-Net ("NNN") leases are leases whereby the tenant is responsible for all operating expenses, including taxes, insurance, the structure, and the roof. A pure NNN lease that will cover these costs throughout the term of the lease is often referred to as an "absolute NNN lease." Some leases are called "triple net" that do not include the expenses of the roof or structure of a building.

Length of Lease

It doesn’t take a mathematician to figure out that there is less volatility in long-term leases versus short term. Most long-term leases tend to benefit both parties. In my office space, which I rent, I was able to secure a ten-year lease. I loved this as rents were low at the time and by “locking in” this rate for ten years I could count on the price stability for my business budget. My landlord could do the same. He knows that he has a tenant that will pay every month for the next ten years. He can run his building budget knowing that this income will be consistent, allowing him to make long-term decisions regarding what he needs to do with the building.

The great combo

In my opinion, finding real estate to buy that has dependable investment grade long term leased tenants is the perfect match. Drive through your town and look around. Who do you want to lease to if you had the choice. A company like Kroger's, Tractor Supply, or CVS or would rather have small businesses with less history and shorter-term leases? I think that this is an easy question to answer. Investment-grade, long-term net-leases can provide stability of income and value to investors despite difficult economic circumstances. The lease payments typically are backed by some of the country's strongest corporations. Whereas smaller, regional tenants (or even individuals in apartment assets) may struggle to make rent payments, large, profitable, and well-capitalized companies are often in a much better position to maintain their obligations despite the economy's twists and turns. A strong tenant tied to a long-term lease can significantly reduce an investor's downside exposure in a volatile market.

Invest in Real Estate like Tony Gwynn hit

Often referred to as Mr. Padre, Tony Gwynn was the epitome of a pure hitter, known for his extraordinary ability to spray line drives all over the field while rarely striking out. Gwynn spent his entire 20-season career with the San Diego Padres, accumulating over 3,000 hits and maintaining a remarkable .338 lifetime batting average, achievements that place him firmly among the game's all-time greats. We all want a Ted Willaims (career .341 batting average with 521 home runs) or a Lou Gehrig (career .340 batting average with 493 home runs) but having a no strike out hit machine like Tony is what I want from my real estate investments. Gimme those base hits. Lot’s of them.

In choosing real estate investments for investors, one of the things I like to do is buy into a diversified portfolio of triple net leased, long term leased, big tenants' properties. I strongly believe that these types of real estate investments can be a fantastic diversifier in an investor’s overall allocation.