2 Overlooked Income-Generating Assets for the Smart Investor

These real estate plays are great ways to earn some extra income on your investments

When it comes to investing for income, there are plenty of dividend-paying stocks and an even larger and more varied assortment of bonds paying all sorts of coupon and interest payments.

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But beyond the basic dividend stocks and interest-paying bonds there are plenty of assets out there that any individual investor can buy into for higher-income streams. I’m going to present two of them, which I have been following and recommending for years. I have also been showcasing these assets in my Profitable Investing, which is about to celebrate 31 years of publication.

So, read on for two great overlooked sources for more income for the smarter investor.

U.S. Government Cash

Americans paid the federal government some $1.7 trillion in income taxes in fiscal 2018. But now there’s a way to get Uncle Sam to cut you monthly checks for a great stream of income.

How? By owning shares in properties leased by federal, state and local governments.

This arrangement was first allowed under the Cigar Excise Tax Extension Act of 1960. In addition, the structure was further reformed under the Tax Reform Act of October 1986 passed by Congress and signed into law by President Ronald Reagan.

Behind these arrangements are real estate investment trusts that own properties and in turn lease them to governments. These REITs pass through the majority of profits to you in the form of quarterly distribution checks or credits to your brokerage account.

And with Uncle Sam as a tenant, you’ll be all the more secure as his checks are as good as the U.S. Treasury. If you’re leasing property assets to the U.S. government, I have a very good REIT for you to buy for more income.

Income-Generating Assets: Easterly Government Properties (DEA)

Source: Chart by Bloomberg Finance

Easterly Government Properties (NYSE:DEA) was founded back in 2011 as a private company by a collection of folks with considerable experience in the government leasing market. One of those experts was the former commissioner of the General Services Administration’s Public Buildings Service, which oversees all building facilities for the federal government.

The real estate company went public in 2015 as a REIT. And since then, shareholders have enjoyed a total return of 94.7% which equates to an average annual return of 14.8%.

It has a wide swath of properties that are nearly full. Most are in longer-term lease agreements. This provides a great deal of stability, not just with government officials as its tenants — but with the certainty of low turnover for many years to come.

Funds from operations have been expanding over the trailing four quarters by 6.8%. This figure measures revenues generated from its actual business of leasing properties and excludes other ancillary profits. Its operating profits based on FFO are currently running at 9.3% making its leases very attractive for investors. And with strong and expanding cost controls, I would project that the profitability of the portfolio will improve even further.

The dividend is sitting at 4.5% which is above the average for the overall U.S. REIT market as tracked by the Bloomberg U.S. REIT Index. And its dividend should see some further growth. Its property leases and cost controls have risen over the past trailing three years by 4.9% on an average annual basis.

Income From Idle Real Estate

While the old adage about real estate — that it always has value — still holds, there are plenty of parcels and buildings that just sit idle. And idle real estate is really just dead money.

But it doesn’t have to remain dead money. It can be revived to generate plenty of income flowing into your pockets — even if you don’t own the land or the buildings.

One of the best ways to make idle real estate generate cash is to use it for temporary storage facilities.

The process is one of the simplest in the real estate market. For owners of suburban or rural land, this is a great intermediate step before developing or selling because storage facilities are easy to construct and easy to take down.

Simply grade the land. Bring in very basic utilities and pour some concrete. Then add modular storage units and set up fencing. When all that’s done, the facility is pretty much ready to generate revenue. And if and when the property is needed for a higher purpose, reversing the facility is relatively straightforward.

In urban settings, many buildings can be retrofitted for storage. Stripping out drywall and turning a building into a shell is the first step. And like for rural land, the reversal of removing modular units can be done with relative ease.

This can be done if you’re the owner of the properties. Or if not, there are a collection of REITs that are in this market that take more of an active role in property development. And in turn, these plots of land provide the owner with plenty of income.

Americans and Self-Storage Facilities

One of the reasons self-storage companies are booming is because Americans are in love with having more stuff. Retail sales in the U.S. continue to rise on a monthly basis.

From the recent lows of 2015-2016 when consumers were only adding some 2% or less, 2018-2019 has seen sales gains running more than double at an average rate of 4.2%.

And with consumers remaining comfortable, more stuff will be finding its way into U.S. households.

But U.S. households only have so much space for more stuff. This brings in the self-storage market that provides the extra space. Materialism has created an industry that’s topping $38 billion with revenue gains running at an average of 7.7% from 2012 to date.

Right now, 1 in 11 Americans use a self-storage facility. And it isn’t just about stuff crowding out homes. More than 40 million people in the U.S. move each year. That’s about 14% of the population on the move annually. That means that besides the hoarders, movers are also contributing to the market for self-storage.

And self-storage facilities have additional benefits. They often allow automatic monthly payments off a credit or debit card.

Many customers sign up and forget, allowing fees to just keep flowing. And many self-storage companies set up accounts so that the longer the units are rented, the higher the rental rates rise. This keeps customers focused on their contracts.

A Fractured Industry

On the other hand, the ease of developing storage units has led to a very fractured business. With so few barriers to entry, there are many mom-and-pop operations offering storage space facilities on their idle land or in vacant buildings.

In fact, right now the majority of all storage companies are locally owned and managed. This proves that idle property can be transformed into income-generating investments.

But there is a movement to make this even more profitable as larger companies are moving to change and improve the patchwork of locally run storage facilities.

Self-storage facilities are going through a massive consolidation. Recognizing an opportunity, bigger companies are buying up the mom-and-pop facilities. And they are also rolling up smaller companies to gain scale. When independent operators or smaller companies want to keep their land and facilities, publicly listed storage companies offer them the ability to outsource management and marketing with national branding. That’s where this next REIT comes in.

Life Storage (LSI)

Source: Chart by Bloomberg Finance

Life Storage (NYSE:LSI) has been in the self-storage market since 1985 when it was known as Uncle Bob’s Self Storage. It has facilities that span 29 states and operates over 800 properties.

It continues to acquire properties from the fractured market that I note above. And it also provides management and branding services to local mom-and-pop facilities.

This REIT also has led the way in customer accessibility. It built out an online and app-based platform that is touchless. This means that customers can find and sign contracts without any brokers or salespeople. This has led to great customer approval, particularly with younger customers.

Life Storage has generated a return for investors of 386.6% over the trailing ten years, which equates to an average annual return of 17.1%. Its FFO return is running at 12.6% and has been generally climbing each quarter since 2016.

The dividend distribution is running currently at $1.00 per share and has been rising over the trailing five years by an average rate of 8%.

Life Storage is an attractive play on the growing trend to transform idle land into income producing properties.

Now that I have shared some of my ideas for income-generating assets, you might take a look at the rest of my research and recommendations in my Profitable Investing. In addition, you can also sign up for my free weekly ezine — the Income Investors Digest. And for a series of income ideas, take a look at my recently published book, Income for Life, which covers 65 income streams in nearly 400 pages that anyone can get. And I’ve written them all up in a simple and engaging way.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.


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