Chris’ note: This year, I’ve been on a mission to help you successfully navigate the bear market. And this week, I’m spotlighting our experts’ top strategies for not just protecting… but also growing… your wealth.
Today, we turn to income investing expert and friend of Legacy Brad Thomas. As regular readers will know, Brad lost his fortune as a real estate developer in the 2008 crash. But he built back his millions by investing in real estate through the stock market.
It’s all down to special kind of investment vehicle that came in the scene in 1960, during the Eisenhower administration. And it allows you to pick up income checks from multibillion-dollar commercial real estate portfolios.
They allow you to become a landlord… without owning any real estate.
Chris Lowe: I want to get into the big idea you’re spreading the word on – investing in real estate through the stock market. But first, talk to me about your background. You didn’t start out as an investment advisor. You started as a real estate guy. Tell me about that journey.
Brad: When I got out of college, I became a leasing agent. Then opportunity knocked, and I became a commercial real estate developer.
I built standalone properties and strip malls for Blockbuster, The Athlete’s Foot, Advance Auto Parts, and Dollar General. I also bought two Papa John’s franchises and two Athlete’s Foot franchises – and the properties they worked from.
At the peak of my career, I had more than 100 rent checks coming in every month. But there was a transformational moment in my life. It came with the Great Recession of 2008.
I lost everything in the crash. That’s when I decided it didn’t make sense to try to build my wealth through various real estate partnerships with complicated tax returns. Instead, I began investing in real estate through the stock market.
The great thing about stocks is you can buy and sell whenever you want. You just go online… open your brokerage account… and click a button.
In 2008, it was difficult for real estate owners to sell property quickly. That’s why it was so devastating. Even when you knew trouble was coming, you couldn’t get out in time. With stocks, you can buy and sell every day. That’s a much more attractive proposition.
Investing in real estate through the stock market means you can be a landlord without the late-night calls from tenants… or being a plumber on the weekends.
But many investors are still unaware of how profitable this approach to building wealth can be…
So, in 2010, I started writing about this new strategy on a financial website called Seeking Alpha. I now have the most followers of any other writer on that website.
Chris: Some Daily Cut folks will know all about your strategy. But can you explain for newer readers how you invest in real estate through the stock market?
Brad: It’s thanks to something called a real estate investment trust – or REIT. It’s a special type of investment vehicle that came on the scene in 1960, during the Eisenhower administration.
REITs are simple to understand. They trade like a regular stock on a public stock exchange such as the New York Stock Exchange. They own income-producing real estate. And they pay out the rents they collect to shareholders.
To legally qualify as a REIT, a company must pay out at least 90% of its taxable income to shareholders in the form of dividend payments. And most REITs pay out 100% of their net income to shareholders.
They’re pass-through businesses. This means they’re not subject to corporate income tax. This is a big deal, since those financial obligations eat up 21% of regular companies’ profits.
This year, REITs have sold off with the rest of the stock market. But that’s great news if you don’t own REITs and are considering them to invest in America’s $2 trillion real estate market.
And because investors have beaten down REITs’ share prices, you can buy solid REITs today with dividend yields of 4%, 5%, even 6% or higher.
Chris: What kinds of income-producing properties do REITs own and operate?
Brad: Different REITs own different real estate niches. It’s not just apartments, office buildings, and malls. There are also REITs that own cell towers, data centers, cannabis growing facilities, nursing homes, and solar farms.
Chris: One of our readers’ biggest worries right now is record inflation. It’s the highest it’s been in 40 years. That has a lot of people worried about investing, period. How do REITs work out during times of high inflation?
Brad: Well, REITs own real estate. And real estate is a great inflation hedge.
The great thing about real estate is it offers pricing power. As inflation goes up, landlords can raise their rents. Take apartment REITs. I’m sitting in an apartment right now. It’s a place I rent in West Palm Beach, Florida, to use when I’m here on business.
About a year ago, the landlord sent me a lease renewal offer… with a 60% rent increase. I tried to move out of the place. But I couldn’t. Rents have been rising like crazy around here. That’s pricing power.
The owner of this apartment building isn’t worried about inflation. Sure, energy and maintenance bills have gone up. But so have his rent checks.
Self-storage is another excellent play during inflation… again because of pricing power. Self-storage REITs can adjust rents every day. And they’re using sophisticated technology to help them monitor supply and demand to set rents.
So, REITs should be at the top of your shopping list as an investor when inflation spikes. Going by figures from real estate investment firm Cushman & Wakefield, REITs see an average 1.1% increase in “total returns” – share price appreciation plus dividends – for every 1% increase in Consumer Price Index (CPI).
And according to the National Association of REITs, REIT dividends alone have outpaced CPI inflation in all but two of the last 20 years – a 90% win rate. Plus, REITs have outperformed the S&P 500 over the past 25 years.
They don’t just survive when inflation hits – they outrun it.
And right now, the stars have lined up for REITs. The bear market has pushed down the share prices of REITs. That means higher yields.
Chris: Do you have any specific recommendations in the REIT sector?
Brad: My favorite REIT is Realty Income (O). It owns more than 11,000 properties across America and Europe. And its tenants are recession-resistant businesses such as grocery stores, convenience stores, and dollar stores.
Realty Income is also a reliable dividend payer that sends its shareholders a dividend check every month. It trademarked the name The Monthly Dividend Company® to reflect that.
Even better, Realty Income has a tradition of raising its dividend every three months. And it recently announced its 100th straight quarterly dividend increase. That’s 25 years of steadily increasing income.
I’m willing to bet it’ll keep growing for the next 25 years and beyond.