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The 7% Townhouse

Ian Wyatt

Sometimes the best lessons come from the investment opportunities that we miss. Today, I’ll share one of mine with you.

One year ago, my neighbor in Richmond Vermont offered me an opportunity to buy a townhouse located adjacent to my office building.

It was a new three-bedroom home in our little village in the foothills of the Green Mountains.  Our town itself isn’t particularly remarkable, but the location is great – 20 minutes to the college town of Burlington and the nearest ski slope.

He was asking $217,500.

And I should have jumped on it.

The reason is simple.  I had the cash, and could have bought the building outright.

Based on comparable properties, I could have rented the property for about $1,500 per month.  After my expenses – including taxes and property maintenance – I would have rental income of about $15,000 per year.

Assuming that I had paid full asking price, the rental income would translate into a 7% investment yield. At triple the yield from Treasuries or blue chip dividend stocks, that’s a pretty healthy stream of income.

Of course, there was also the potential benefit from rising home prices too. 

Recent data from the Case-Shiller housing index of the 20 biggest U.S. cities indicates that home prices rose 12% over the last year. Home prices have performed well over the long-term, and there is reason to believe that modest increases in home prices could become the norm once again.

Some housing markets such as San Francisco, Las Vegas, and Phoenix are becoming red-hot once again. With an influx of new “hot money” investors – including hedge funds – in the housing market, the biggest bargains may be something of the past.

However, in Vermont and many other parts of the country, the big investors haven’t shown up yet. If you live in one of these places, the housing rebound is still in its infancy, and home prices remain reasonable.

Obviously any decision to buy a single-family home as a rental property is market dependent. And I suspect you know your local real estate market better than I do.

But if you’re like me and you’re looking for a way to earn some decent investment income, a rental property may be worth considering. Owning a “hard asset” in your neighborhood is a tried and true retirement plan that some investors have embraced.

So why did I choose to skip this opportunity?

I had my reasons at the time.  My life was too busy. I was running my 15-employee investment research firm.  And my wonderful family – including a five-month old daughter and two-year old son – kept me plenty busy on the home front.

Like most people, I didn’t want the hassle of finding tenants, managing a property, or fielding late night phone calls when the dishwasher broke.  And my avoidance of the hassle resulted in missing a great income investment.

If you’re at or near retirement age and know how to swing a hammer – this type of “local” yield investment might be right for you.

However, if you don’t want the inconvenience of managing a rental property, REITs provide an alternative.  In my High Yield Wealth investment advisory, I’ve been recommending several REITs that are in the business of renting commercial space.

One of our best performing REITs specializes in health care facilities. In spite of Obamacare uncertainty, this stock has been a stellar performer.

Based on our purchase price 18-months ago, this REIT is paying a 10.1% dividend.  Even better – the share price has doubled from $17 to $34. That gain far exceeds the bounce in home prices over the same period of time.

My investment portfolio includes a commercial office building that serves as the office for my company.  I also own shares of several REITs.

But today, I’m on the lookout for another property like the 7% townhouse.  The next time one of these opportunities comes across my sights, I’ll be quick to pounce.  I know the opportunity to earn a 7% income stream from a “hard asset” like a home isn’t common. 

Whether you’re on the hunt for rental property or considering REITs for your portfolio, one thing is clear: the recovery in residential and commercial real estate continues to unfold.

The recent increase in housing prices isn’t just a short-term bump. If you’re not “long,” you may wish to consider adding some exposure.  The easiest way to do so starting today is through REITs. If you’re interested in reading some of my firm’s research on our favorite opportunities, you can click here now to learn more.

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