Between wages stagnating and ZIRP policies that keep most folks from earning anything on their savings at the bank or the typical money market fund, the American middle class is having trouble keeping up with housing costs that keep rising beyond the rate of inflation.
In the October 2, 2014 Wall Street Journal, it was reported that the pace of rent growth for U.S. apartments is accelerating despite an uptick in construction of new dwellings as the economy steadily improves and vacancies remain stubbornly low:
“Rental rates increased 1% during the third quarter to an average of $1,111 a month nationwide, according to Reis Inc., a real-estate research firm that collects data on 79 U.S. metropolitan areas. That was up 3.3% from the same quarter a year ago. Last quarter’s 1% increase was faster than the second quarter’s 0.9% rise.
Apartment rents have risen nationally for 23 straight quarters and are 15.2% higher than they were at the end of the recession in 2009. The figures suggest the five-year squeeze on renters shows little sign of easing.”
Rents rise throughout the country
Rents in San Francisco grew fastest, at a rate of 6.4% over the last year; while San Jose has seen rents increase 5.9% and Seattle’s rents have jumped 5.7%.
Annual rents also were up in cities in the South and Great Plains, including Nashville (4.9%), Charleston (4.7%), Denver (4.7%), Houston (4.6%) and the Raleigh-Durham area (4.4%).
Home Sweet Home is no longer so sweet
With rent rises quickening and costs to maintain a home doing the same, many retirees and near-retiree homeowners may consider selling their existing homes. If they owned their homes for much of their working lives, they will be fortunate to have paid off their mortgage and be able to take a good amount of equity out of the sale, even after home prices in many regions of the country lost 30% to 40% in the 2008-2009 financial crisis. In recent years, house prices have been recovering smartly.
Where can retirees retire to?
Desiring a break from ever-rising housing costs and the maintenance required to keep them in shape, many retirees look for alternatives. And senior condo communities have become increasingly popular as they respond directly to these concerns. These communities take care of all the common area maintenance, and many of them do this efficiently at affordable cost.
According to HomeGuides.com:
“…average fees paid to condominium associations vary based on the services provided by individual associations. For example, one condo community might offer a pool, recreational facility and concierge services, with association fees reflecting those services. Another condo community might provide basic services like grass cutting and exterior building maintenance, with relatively low condo association fees. According to the U.S. Census, average condo association fees run $2,400 annually or about $200 a month.”
To keep a condo humming along, The Wall Street Journal reports that property managers need to cover the costs of administration and staff, repairs and maintenance and insurance and property taxes, among other things:
“In 2012, a single condo unit cost managers $2,429.58 a year to maintain, up about 3% from 2011, according to an annual report released in August by the Institute of Real Estate Management, a Chicago-based professional group and affiliate of the National Association of Realtors. The report analyzed surveys of 1,147 condominium managers.
Over the past decade, condo expenses have risen 25%, the institute said.
Building expenses are then passed on to homeowners in annual fees, known as common charges or homeowner-association (HOA) fees, says real-estate appraiser Jonathan Miller of New York-based Miller Samuel. The homeowner association sets the budget for a building.”
Taxes, taxes, taxes…
According to Trulia.com, the average condo property tax in Florida is based on square footage and location, etc. It is generally 2% of assessed value. So, if we are talking in the range of a condo assessed at $50,000 to $100,000, we’re in the ballpark of $1000-$2000 that must be allocated to condo taxes annually.
Average monthly condo costs
If we average the costs for homeowner association fees and property taxes, we can find many areas of the country, including Florida, Maryland, New Jersey and many others that offer affordable living in safe, comfortable, 55 and over adult communities for as low as $4000 to $6000 per year.
A couple 65 years of age will enjoy a projected retirement of approximately 17 years. Using an average of the amounts discussed above gives us an annual housing budget of about $5000 for both annual condo fees and property taxes.
Our objective will be to afford $85,000 in housing costs over these 17 years. So, we will need to obtain income averaging $5000 per year.
Objective: Make targeted expenditure investments in the real estate field to pay average housing expenses of $5000 per year for the length of an average retirement.
Let’s switch hats for a moment and don our real estate developer hats. Instead of just thinking of ourselves as condo consumers, we might change our focus a bit and think like company owners. If we invest in strong, reliable, dividend real estate-related companies that have a history of raising their dividends over long periods of time, we can arrange our investments so as to have those companies pay our condo dues and taxes for us in retirement.
Building a strong foundation with Dividend Growth Investing
There are some very strong candidates that can do the heavy lifting for us and furnish our brokerage accounts with dividends to meet our objective of keeping a roof over our heads in retirement.
Realty Income Corporation (NYSE:O) is a real estate investment trust, or REIT, that refers to itself as the monthly income company because, well, it pays dividends on a monthly basis. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. Their malls, shopping centers and strip malls enjoy a very high 98% or better occupancy rate and are anchored by some of the biggest, well-known chains in the country. As can be seen from the following chart from their company website, Realty Income has been paying a steadily rising dividend for over 20 years. Even in the depths of the mortgage/financial crisis of 2008-2009, this company increased its dividend payout many times.
This is what $100 invested 20 years ago would have done, invested in Realty Income, compared to major stock indexes:
Realty Income is trading today at $40.74, a $5.10 discount from its 52-week high of $45.84, or an 11.1% discount. As with many other interest-sensitive investments, this stock has traded down of late in response to market fears that they will suffer if and when interest rates finally rise. At today’s price, its dividend of $2.19 is presenting a solid yield of 5.4%.
Stonemor Partners LP (NYSE:STON) is a master limited partnership, or MLP, that owns a different category of real estate. It owns hundreds of cemeteries and funeral homes throughout the country. The company’s cemetery products and services include interment rights, such as burial lots, lawn crypts, mausoleum crypts, cremation niches, and perpetual care rights; merchandise comprising burial vaults, caskets, grave markers and grave marker bases. It also provides receptacles for cremated remains, including urns, and the inurnment of cremated remains in niches or scattering gardens; and funeral home services, such as consultation, the removal and preparation of remains, and the use of funeral home facilities for visitation and prayer services. As of May 14, 2014, the company operated 278 cemeteries and 90 funeral homes in 28 states and Puerto Rico.
Rigor mortis has not set in as Stonemor mortifies the competition with its ten-year history of paying out healthy dividends, and increasing them to keep shareholders alive and kicking and ahead of inflation.
Today, Stonemor is trading for $25.35, and sports a very healthy dividend of $2.44 for a 9.6% yield. In the space of two years, spanning the 2008-2009 financial crisis, this company raised its quarterly dividend several times, from $.515 to $.535 to $.555. Like a staple consumer company such as General Mills, Inc. (NYSE:GIS) keeps churning out food that people must buy to eat and live, Stonemor provides the end-of-life care that every one of us eventually can’t live without.
Sun Communities Inc. (NYSE:SUI) is another REIT. It owns, operates, and develops manufactured housing communities in the Midwestern, southern, and southeastern United States. As of April 1, 2011, it owned and operated a portfolio of 136 communities comprising approximately 47,600 developed sites. The company, through its subsidiary, Sun Home Services, Inc., is also involved in marketing, selling, and leasing new and pre-owned homes.
Since 1993, this company raised its dividend 4%-5% each year. Beginning in 2005 it went through a period of several years of no increases, but it did maintain its dividend through the financial crisis of 2008-2009. Shareholders suffered no cuts in their income and in March of this year, Sun resumed its healthy increases once again.
It currently pays a quarterly dividend of $.65. As the stock traded today at $50.69, its current annual yield is 5.13%. Again, with concern for interest rate sensitivity, this stock is trading at a 7.8% discount from its 52-week high of $55.00, presenting an interesting entry point.
Various reports and newspaper articles indicate that a couple retiring today faces an average of $85,000 in condo fees and property taxes over an average 17 years of retirement. Once targeted expenditure investing is employed, these costs can be easily met.
Once the retiree couple knows where their “rent check” is coming from, as well as all their housing costs for the rest of their lives, they can sleep well at night. They can rest easy knowing they’ll always have a roof over their heads. This is true SWAN investing.
In the first installment of this series, I addressed ways to target investments to pay for utility, electric, cable and phone bills in retirement. In the second installment, I offered suggestions to help pay the various energy bills in retirement, including heating oil, natural gas to heat our homes and gasoline to fill the tank. The third installment dealt with the costs of healthcare that we all face. The fourth article in this series addressed food insecurity and how to deal with that in retirement.
Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, please feel free to find them here.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.