Passive income has become a big buzzword. The allure of collecting steady income without “actively” working for it is stronger than ever.
One of the most popular ways to create a passive income stream is through real estate — at least in theory.
The process goes something like this: You borrow money from a bank, buy a property, and the tenant pays off your mortgage and then some. Once you accumulate more equity, you repeat the process, buy more properties, scale up … and boom! You are a real estate mogul.
But the reality is different.
If you want to be a landlord, you need to find reliable tenants, collect rent, and handle maintenance and repair requests (out of your own pocket) and cover municipal rates and unit levies. On top of that there is the bank interest to factor in, albeit that there are tax deductibles as well in this equation.
What about a property manager?
A good property manager can make life easier, but personal finance expert Dave Ramsey points out that the income is still not as passive as it seems.
“Even if you are managing the managing company, they’ve still got to call you and approve the R8,400 new geyser that blew up, or the other day I had a R26,000 one go out on one of our commercial buildings. Didn’t feel passive to me at all.”
Ramsey still likes real estate as an asset class but warns that investors should know what they are getting into.
“I love real estate. It does give you a better rate of return that other investments don’t have, but when I hear someone say passive income and real estate in the same sentence, it means they’ve been on get-rich-quick websites.”
So how can you invest in real estate and make it as hassle-free as possible?
Here are two ways to consider.
REITs
REITs stands for real estate investment trusts, which are companies that own income-producing real estate like apartment buildings, shopping centers, and office towers.
You can think of a REIT as a giant landlord: It owns a large number of properties, collects rent from tenants, and passes that rent to shareholders in the form of regular dividend payments.
To qualify as a REIT, a company must pay out at least 75% of its taxable income to shareholders as dividends each year. In exchange, REITs pay little to no income tax at the corporate level.
Of course, REITs can still experience rough times. During the pandemic-induced recession in early 2020, several REITs cut back on their dividends. Their share prices also tumbled in the market sell-off.
Some REITs, on the other hand, manage to dish out reliable dividends through thick and thin.
It’s easy to invest in REITs because they’re publicly traded.
Unlike buying a house — where transactions can take weeks and even months to close — you can buy or sell shares in a REIT anytime you want throughout the trading day. That makes REITs one of the most liquid real estate investment options available.
Invest in REIT ETFs and Unit Trusts
Picking the right requires due diligence on your part. If you are looking for an easier, more diversified way to invest in real estate, consider exchange-traded funds.
You can think of an ETF or Unit Trust as a portfolio of stocks. And as the name suggests, ETFs trade on major exchanges, making them convenient to buy and sell. Unit Trusts are similar to ETF’s, but are mostly actively managed, where an ETF could track its allocation of a specified property index. You can elect that your distributions are re-invested or paid out to you, depending on the fund and whether a local or overseas based fund, half yearly or quarterly.
Investors use ETFs and Unit Trusts to gain access to a diversified portfolio. You don’t need to worry about which stocks to buy and sell. Some ETFs passively track an index, while others are actively managed. Unit Trusts are mostly actively managed. They all charge a fee — referred to as the Total Investment Charge or Total Expense Ratio — in exchange for managing the fund.
There are a number local and international REIT funds available on our platforms to invest in from R300 per month