Opinion – Grain in Grain: Three ways to live off real estate income and which one I prefer


When it comes to living on income, investments in real estate appear as the first option among investors. This favoritism is no accident. The image of this type of application is of a secure and stable income. However, there is not just one vehicle to invest in real estate. Additionally, the choice of this vehicle directly influences the income you can earn.

As I said, there are several ways to invest in real estate. I’m going to explore three here: residential real estate, commercial real estate and brick real estate funds.

Traditionally, investors purchase residential or commercial properties for rent for income purposes.

As can be seen in the chart below, according to the FipeZap portal, residential and commercial properties yield, on average, an annual rate of 4.66% (yellow line) and 5.55% (green line), respectively.

To find this rate, FipeZAP uses the rental price and sale price announcement data. Dividing the first by the second results in the rental rate. A rate of 4.66% per year means that you would earn 0.39% per month on the value of the residential property purchased, as a form of rent. In the case of commercial property, it would be 0.46% per month.

However, this return is not net of costs and taxes. Net of costs such as real estate and maintenance expenses, this return drops by around 30%. That is, conservatively, it should assume a return of 0.27% for residential properties and 0.32% for commercial properties.

Notice in the graph that rental rates were once higher in the past, but they fell along with the interest rate drop.

This means that if you want to have a monthly net income of R$5,000, you would need to have R$1.5 million in commercial property and R$1.9 million in residential property.

These are high values. Thus, it is very difficult to have a diversification that allows reducing the worst risk for real estate, which is vacancy. When there is a vacancy, in addition to not receiving the rent, you still have to pay the IPTU and condominium costs.

So these are not alternatives that I would consider interesting. In fact, due to the risk of vacancy, I prefer to invest in fixed income indexed to the IPCA to these two alternatives. A diversified portfolio of IPCA-referenced private securities can yield 0.40% per month exempt above inflation.

Therefore, residential and commercial real estate would only pay if you believed in a stronger-than-inflation price rise.

Unlike these two previous alternatives for real estate income, the next one attracts me more than fixed income, as it has a risk premium.

Brick real estate funds currently distribute an income of 9% per year, through income tax-exempt dividends. This is equivalent to a yield of 0.75% per month, exempt from IR and already net of fees.

To have the same net income of BRL 5,000, only BRL 667,000 would be needed. So less than half of what it takes to have the same income from commercial real estate and with an added bonus.

With the value of R$ 667 thousand, it is possible to diversify into dozens of properties, which greatly reduces the risk of vacancy than the previous alternatives.

You may wonder, what about paper real estate funds? They pay higher dividends than brick FIIs. Wouldn’t they be even better? I will explain this in a next article, because in this case something else needs to be considered.

The biggest disadvantage of real estate funds is the fact that they present price volatility, as they are traded on the stock exchange. This volatility confuses the investor as to what real estate funds represent and their potential.

I emphasize that in the three alternatives, rents are adjusted for inflation. Therefore, I made the comparison with fixed income securities referenced to the IPCA, as these pay an interest income plus inflation.

And you, which of these alternatives do you prefer? Comment here.

Remember that real estate investing has risk. Therefore, the application must consider the investor profile.

Michael Viriato is an investment advisor and founding partner of Investor’s House

(Follow and like De Grão em Grão on social networks. Instagram.) ​​

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