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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

A 6% Yield In Real Estate -- Without All The Headaches

Sometimes I have to learn things the hard way.

I was strongly advised by a family member not to buy real estate in the way I suggested. He said that if you don't pay on the way in on a real estate deal, you pay much more of the way out. It took a financial disaster for me to take this advice to heart.

When I bought my first investment property, I was a new graduate, full of verve and passion. Having read Robert Allen's popular book "Nothing Down" while in college, and having relatives in the real estate investment business, I decided to take the plunge into investment property ownership and management.
Ignoring the advice of my experienced family members to take it slow and steady, I followed Allen's book to the letter in purchasing four investment units in a rough part of town. The book's instructions actually worked, enabling me to purchase the properties with very little of my own money. I was able to quickly rent out the two duplexes at a rate that covered my mortgage payments.

"This is really easy," I thought as I made plans to expand my holdings into a real estate empire. The first few months went great. My tenants paid on time and only occasionally needed things fixed.

Then the trouble started.

One of my tenants called saying she just got divorced and could no longer pay the full rent. Feeling expansive, I gave her a break on the rent for a month while she promised to catch up. At the same time, another one of my tenants lost his job, so he also needed a break on the rent. I let this tenant skip a month's payment, too.

Soon these rent breaks became regular occurrences with these two tenants. I learned that I didn't possess the "tough guy" persona to squeeze the tenants for the money owed. I could have taken the legal route and evicted them, but I believed the tenants would keep their word and pay me. After several months, I realized that I had been completely scammed. These two tenants never intended to pay me, and I learned from another local landlord that both had pulled similar shenanigans in the past.

By the time the tenants had moved out, they had trashed my units. At the same time, I started having repair issues with the other two units. Although these tenants were conscientious, paid on time, and took care of the properties, the small buildings started falling apart. Repairs took all of my profits plus a substantial part of my savings.

I started realizing that these were problem properties in a bad area of town, which was why the "Nothing Down" approach worked. I also overpaid for the properties as an incentive for the seller to work with me on the "Nothing Down" financing.

My once-steady tenants became frustrated with my slower and slower response to these issues. Soon, one moved out, followed by the other. Now I had mortgages to pay, no tenants and ownership of four overfinanced and practically unsellable apartment units. It took me years to dig out of the hole.

I'm well aware of the wealth generated by hands-on real estate investment, but buying and profiting from real estate takes a certain personality and expertise. Not everyone can evict tenants in the cold, calculated manner required. If you are suited for hands-on real estate investment, it's a great way to build wealth -- but if you're not suited for the negative aspects, it can be a financial disaster.

Fortunately, there is an alternative to hands-on real estate ownership. I strongly believe that the bull market in real estate will continue for the next several years. If you agree, you certainly want exposure to this investment. But is this possible without the headaches of ownership?

Not only do I want to participate in the appreciation that I foresee continuing for quite some time, I want steady rent-like payments and liquidity. This way, if I'm wrong and real estate plunges into the abyss again, I can cut my losses rather than sitting on non-performing, underwater, physical properties that are difficult to sell.

This is exactly what my colleague Nathan Slaughter has identified in what he calls the "Renter Nation." He has found a way to "own" property without the hassles and enjoy yields of up to 8.6%. Read his report here.

If you haven't guessed, I'm talking about real estate investment trusts, or REITs. These products are traded just like stocks on the exchange, pay dividends, and can allow investors to earn profits from professionally managed real estate portfolios with none of the headaches or costs of direct ownership. In fact, REITs are required by law to pay out the vast majority of their profits as dividends to the shareholders. This is why many REITs offer such high dividend yields. Nearly every niche in the real estate business has a REIT attached to it.

I particularly like Investors Real Estate Trust (NYSE: IRET) as a way to gain exposure to the real estate market. It is well diversified across residential, medical, industrial, commercial and retail properties in the Midwest. It was founded in 1970, placing longevity and experience firmly in its corner. IRET's dividends currently pay just over 6% and boast a five-year average dividend yield of 7%, paid quarterly. Adding to the bullish case, there has recently been insider buying from a director at the company. Although IRET is not the highest-paying dividend yielder in the REIT space, I find its steady diversified nature, solid dividend and low stock price compelling.

REITs are tied directly to the health of the real estate market. Although I strongly believe real estate will continue its upward trajectory, another setback could easily occur. In addition, Federal Reserve policy regarding interest rates is also a critical factor in the valuation of REITs. Always use stops and position size according to your risk tolerance when investing.

The InvestingAnswer: I like IRET right now in the $8.30 range as a dividend-paying long-term real estate investment. I feel much better with the liquidity of REITs and having my real estate investments professionally purchased (and managed).

P.S. -- As I said, the nation's largest investors are moving to profit from the next housing boom, but Nathan Slaugher has found a backdoor way for regular investors to get in on the action. If you'd like to start collecting "rents" as high as 8.6% without owning a square foot of property, click here now.
- David Goodboy

This article originally appeared on our sister site,
Profit From The Real Estate Boom With A 6% Yield -- And None Of The Headaches.