I will never understand the current obsession with investment properties. The returns aren't anywhere near as good when you factor in the buying and selling costs, plus the huge cash drain of negative gearing.
If you want exposure to property I think a much better option is to go for real estate investment trusts (REITs). These are commercial properties that are leased out.
Here are three of my favourite:
Rural Funds Group (ASX: RFF)
Rural Funds is the only pure-agricultural REIT on the ASX. It holds a diverse array of farm types including cotton, cattle, poultry, vineyards, macadamias and almonds in several states and climactic conditions.
It leases those farms out to high quality tenants like Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV) and has rental indexation built into the rental contracts. That's why management are confident with an annual 4% increase to the distribution each year.
Rural Funds is currently trading with a distribution yield of 4.7%.
National Storage REIT (ASX: NSR)
National Storage is the largest self-storage provider in Australia and New Zealand. Being the biggest should hopefully result in the best economies of scale and allow National Storage to generate the most profit compared to its competitors.
It is benefiting from the high price of Australian real estate in two ways. First, people will view the units as much more economical than owning an extra bedroom in their house – which could cost more than $100,000. Second, it allows National Storage to charge more per square metre.
National Storage is currently trading with a trailing distribution yield of 6%.
Arena REIT No 1 (ASX: ARF)
Arena is one of the largest childcare property owners in Australia, it also leases a few medical buildings to Primary Health Care Limited (ASX: PRY).
The REIT seems to have identified a good growth area, with the number of babies being born in Australia reaching all-time highs.
It has generated strong operating earnings growth over the last few years and currently has a distribution yield of 5.9%.
Foolish takeaway
At the current prices I wouldn't say that any of the above REITs are trading cheaply. However, Rural Funds is by far my favourite REIT, so if I had to pick one for the next decade or two, I'd go for that one even with the premium.
But, interest rates could damage property values in the short to medium term, so I can understand if investors hold off for the meantime.
