Pragmatic Income Investing with REITs

As I’ve built up my portfolio over the last year, the final question has been “How can I effectively earn income off of my investments?”

I have several investment accounts including my work 401(k), a SEP IRA with Betterment, a traditional IRA, a traditional brokerage with effectively $0 in it, and a traditional trust account with Wealthfront. Each of these accounts has a different purpose, but none of them provide me with current income.

I recently had to take money out of Betterment because I over contributed to my SEP IRA in 2017. Instead of cashing out, I decided to repurpose my traditional brokerage account to invest in Real Estate Investment Trusts (REITs). REITs are an income investor’s dream as these operating companies are required to distribute 90% of net income or face tax penalties. In return they do not pay income tax. On the flip side, REIT dividends are taxed at the investor’s marginal tax rate so the government gets their “rake” there. Most C corp stocks become “qualified dividends” at some point and are taxed at a 15% rate so you have to do a little bit of math to determine the best after-tax return, risk-adjusted.

I chose REITs as an investment vehicle because real estate is something that I know very well, definitely better than most people. In my former life as a banker, I used to underwrite loans for real estate partnerships, including a couple publicly traded REITs. Real estate is a very predictable asset class and well managed real estate operators know how to adjust purchases to achieve target ROIs for their investments. Because of this predictability and stability, as an investor it is relatively easy to determine a valuation of a REIT and any good investor will tell you that:

Your return is made when you buy an asset, not when you sell it.

This is where my software and finance backgrounds kick in.  I built a tool that tracks various interesting REITs that I found through some research. Every day it tracks the prices and dividends paid to determine a proper valuation for the universe of tracked REITs. I even made my first investment in EPR Properties, an owner of Top Golf properties, because the tool showed it as extremely undervalued. This was great for me because it was yielding over 8% at the time and has also produced a 20% price return in just a few months. Of course since I mention that, I expect it to crash and burn 😛.

I’ve thought about making this tool available for public consumption, but it needs a little bit of work. It is out on the interwebs, so if you would like to access it and try it out please leave a comment below.

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