Current Income (Real Estate Investments)

What is Current Income (Real Estate Investments)?

Current income is an investment strategy that gives investors exposure to consistent above-average payouts. The most common current income-focused investments are individual securities and real estate investments, which provide short-term payouts, as well as long-term investment appreciation.

 

Current Income

 

Real Estate Investment Trusts (REITs)

Investors looking for regular income from real estate investments can invest directly through developing and acquiring real estate properties or by investing in REITs that consist of real estate properties as their underlying assets. REITs own and manage real estate properties, such as office buildings, residential apartments, shopping malls, vacation homes, warehouses, etc.

Rather than buying or developing real estate properties directly, investors buy shares in the managed portfolio of properties. REITs make money from rental income, sale of properties, commissions from managing properties, service to tenants, etc. The REITs are required to distribute a majority of their net revenues to shareholders either monthly or quarterly, making them an ideal investment opportunity for investors looking for regular income and high yields.

 

How Investors Make Money from Real Estate Investments

Real estate investments allow investors to earn revenues through a variety of ways, such as rental income and property appreciation. Also, there are different types of real estate investments that investors can invest in, either directly or through REITs. They include residential, commercial, hospitality, farmland, industrial, and retail investments.

Real estate investors earn through the following ways:

 

1. Capital appreciation

One of the things that real estate investors are keen on when buying a property is whether the property will gain in capital appreciation in the future. Appreciation refers to the increase in the value of a property because of certain factors, such as economic trends, supply and demand, infrastructure, population growth, location, future development plans, etc. that influence its rate.

One of the main factors that influence property appreciation is inflation. There exists a direct correlation between inflation, demand for properties, and price appreciation. When the demand for properties is increasing, property prices go up if the supply is not enough to meet the demand.

Similarly, during periods of high inflation, property prices go up, so do the prices of land and construction materials. Investors who own properties in a given location expect to profit from the price appreciation of their properties when the demand and inflation are high.

Also, owning properties in an area earmarked for development projects, such as railways, shopping malls, roads, airports, etc. is likely to fetch a higher market value in the future.

 

2. Rental income from leasing properties to tenants

Owners of real estate properties, such as office buildings, apartments, and warehouses, expect to earn a rental income by letting tenants use the property for an agreed period of time. The rental income may be paid every month, quarterly, annually, or according to the payment period agreed between the property owner and the tenant. Most investors prefer to deal directly with the tenants, while others prefer outsourcing property management to a real estate agent.

From owning real estate properties, the owner or landlord receives net rental income (after deducting expenses). Some of the expenses incurred by property owners include property taxes, maintenance, homeowner association fees, etc.

A real estate property provides its owner with a combination of the utility and the net present value of cash flows it generates relative to what was originally paid for the investment. The rental income provides investors with a margin of safety both in the short term and in the long term.

 

3. Income from operations

Apart from rental income, property owners also get an opportunity to earn from business operations within the real estate properties. For example, the owner of an office building can offer parking services to tenants and charge them a fee above what they pay as rental income.

In residential properties, property owners can offer laundry facilities and transport services to workplaces for a small fee. Other types of real estate investments, such as hotels, apartments, and warehouses, can also generate additional revenues for their owners by offering a chargeable service to tenants or guests leasing the properties. It provides property owners with an additional income stream to supplement the rental income.

 

Current Income: Alternatives to Real Estate Investments

 

1. Dividend-paying stocks

Dividend-paying stocks provide high returns to investors, and the best options are those that are well established and mature. Although the stock market involves a higher risk than the bond market, dividend-paying stocks provide investors with a modest income and an opportunity for long-term appreciation. A majority of dividends are paid out four times per year when the quarterly earnings reports are released, but there are companies that pay dividends annually or semi-annually.

 

2. Debt income securities

Debt income securities are synonymous with paying consistent fixed income to bondholders. There are dozens of local and international debt offerings that pay fixed periodic interest payments and full payment of the principal amount at maturity.

The interest payments are made annually or semi-annually, and they provide a guarantee to investors looking for regular payouts. An example of a debt income security is Treasury bills, which pay semi-annual interest payments at fixed coupon rates and are backed by the full faith of the US government.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Fixed Income Securities
  • Private REITs vs Publicly Traded REITs
  • Residential Properties REITs
  • Treasury Bills (T-bills)

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