In times of economic uncertainty, investing your money in an investment that generates monthly income can be a sound strategy. One way to do this is to invest in an income investment such as a real estate investment trust (REIT).
Income investments typically pay investors a monthly income while the book value of their investment moves up or down like any other investment. So why choose an income investment over a stock investment or mutual fund? Simple: If you receive cash returns each and every month and then your unit price drops, you may still have a positive return for the year. Simply put, you took your money off the table already covering any potential losses in your unit price. Of course, if your unit price increases, it actually compounds your rate of return often into double digits.
Here’s an example:
Unit Price: $ 10
Initial Investment: $100,000
Distribution Rate: 9% annually
Monthly Income: $ 750
Annual Income: $ 9,000
Now, let’s assume for a moment that your investment dropped to $9.50 at the end of the year. The value of your investment now stands at $95,000. Have you actually incurred a loss at this point? Not at all. $9,000 annual distribution - $5,000 value decrease = an actual return of 4%. Now let’s look at a more positive scenario:
Let’s assume your investment increases in price to $10.50 a unit. Your investment would now be worth $105,000 in addition to the $9,000 you received in distributions. Your total return for the year would be $14,000 or 14%.
Here’s one more final tip. With interest rates at an all time low, some investors are borrowing to make their investment purchases. The strategy is really quite simple and even offers some tax benefits. Here’s what you need to do.
Visit your banker and talk about a home equity line of credit or a line of credit secured against a GIC or RSP investment. Based on today’s prime rate, you can borrow money using this strategy at just 2.5% or slightly higher! Then, choose your income investment such as a REIT and make your investment. If you find an investment paying 9% and your borrowing at 2.5%, you’re earning a 6.5% spread using the equity in your home, GIC or mutual funds that is otherwise not working for you. On a $100,000 investment, that would be $6,500 in your pocket each year! That $6,500 can be re-invested, used to pay down your investment loan or can be used as new household income.
Furthermore, the $2,500 in interest you would pay (on $100,000) is tax deductible against your personal income tax. That’s right, the actual interest rate you could pay is less then prime once you factor in your tax savings.