Four Ways To Increase Client Income: Part Two

My first article in this series identified four ways to increase client income:

• Income-only plan
• Systematic/Partial Withdrawal Plans (SWP)
• Annuitization
• Combination of SWP and annuitization

This second article adds the remaining three points of the income-plan.

Rental income

An overlooked source of revenue to help create the blended income stream of your clients is rental income. Many people, whether single or married, often purchase large homes in suburbs when they are younger. If a client has owned such a property for a number of years, the balance of their mortgage is often low or has been paid off.

A client in this situation often considers their large four or five bedroom home in the suburbs to be an albatross around their neck and just want to sell it. Before they do that, ask this question. Have they considered moving to a smaller condo and turning their large home into a rental business?  I use the word “business” intentionally since renting a large home is a business. Certainly, the IRS thinks so because of the number of tax advantages which attach to a rental property but not your primary residence. Example, while you need to consult your accountant, the cost of repairs can usually be deducted from the rental income.

A client who owns a home in a metropolitan area with a shortage of high-end rental homes can receive substantial monthly income by renting their property. If your client has a large home or apartment, another way for him or her to increase income is to join a site such as www.airbnb.com and rent out some of their rooms. (We are not endorsing this company; it’s just the most well-known).

A second way to benefit from rental income is to purchase a REIT, or real estate investment trust.  It’s important to remember that REITs are not mutual funds. There are mutual funds which purchase REITs, but REITs themselves are not mutual funds. According to the REIT trade association, Nareit: [1]

“A REIT is a company that owns, operates or finances income-producing real estate…There are more than 225 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges—the majority on the NYSE. These REITs have a combined equity market capitalization of more than $1 trillion.” [2]

Favorable tax treatment makes REITs desirable as income investments. By law, REITs must annually distribute a minimum of 90% of their taxable income to shareholders. [3] Hence, this investment is designed to pay high dividends. You don’t purchase REITs for capital appreciation since they will trade in a narrow band unless there is a significant move in interest rates.

The last product I recommend for an income-only portfolio are annuities. There are many types of annuities, so you must understand the specific needs of your clients. Further, as a Finacial Advisor, when searching for an annuity which fits the goals of your client, it’s best to be guided by the expression, caveat emptor, or “buyer beware.” Commissions and annual charges of different sorts within the annuity can mount up. Before buying an annuity, you must calculate the costs. High costs can make annuities an unattractive investment.

But if you steer your income-oriented clients to a low-cost annuity, this vehicle can give them peace of mind and a guaranteed income for a specific period of time or for life certain. As clients age, many fear running out of money before they pass away. A good annuity will put this fear to rest. While you can invest in an annuity over time and accumulate a balance, I recommend purchasing a single premium annuity and then immediately annuitizing, to then begin receiving payments.

Reason? An index fund will cost your clients almost nothing, but even a low-cost annuity will have higher annual charges than an index fund. So why pay those extra charges until you need to? Finally, you only want to buy an annuity from a top rated insurance company. If you buy an annuity from a less than stable company and that company goes under, your client will lose their entire investment.

Resources: 

[1] https://www.reit.com/nareit

[2] https://www.reit.com/what-reit/frequently-asked-questions-about-reits

[3] https://www.law.cornell.edu/uscode/text/26/857

To read Four Ways To Increase Client Income: Part One, click here. 

To learn more about this topic, register for our Retirement Planning Service courses. 

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Contributing Writer: Subject Matter Expert Charles McCain