The first of the month puts a smile on every real estate investor’s face. Checks start showing up in their mailbox based on a contract the tenant signed months ago.
Real estate offers what you crave – yield.
But I’ve always had two problems with real estate investing. First, expenses are high. Putting a roof on the building and cleaning up between tenants who destroy the walls takes money out of those rent checks.
Beyond that, yields are continuing to drop. Investors have piled over $1 trillion into REITs by the end of 2015 seeking the predictable yield they promise. As more money comes in, yields start dropping.
Yet, it’s better than the 10-year Treasury rates sitting at 0.1%.
I’ve spent the better part of the last five years trying to find little known investments with solid yields. My criteria are simple.
- It must produce real, consistent cash flow – I’m not interested in waiting on capital appreciation. A bad earnings report can end up wiping out years worth of gains on an individual stock.
- It must be cheap to maintain – Running to Sears to buy a new refrigerator eats up the entire month’s rent. Instead, I want an asset that doesn’t require big capital expenditures for the basic maintenance.
- It can’t be in a bubble – When everyone else knows about it, it likely means that prices are getting too expensive. Billion dollar REITs are raised with steady frequency. They all chase after the same inventory which means lower and lower yields.
Seems simple right?
I can assure you, it’s not. I looked into all different niches within the real estate market; single-family homes, commercial real estate, apartment units, and even billboard leases. I dug into a growth market like cell phone towers (did you know an average tower sells for over $500,000?). I even explored opportunities in the municipal bond and junk bond markets.
And granted, there are opportunities in each of those – still – but everything simply felt expensive by my measurements.
Then I stumbled upon something that made complete sense.
Ultimately, royalty payments are when you take a cut of every transaction related to the asset you own. Checks are usually cut on a monthly or quarterly basis so you don’t have to wait long to start seeing hard cash flow.
A lot of royalty payments are on intellectual property (patents, music, design licensing, etc) so maintenance costs are low.
In a bubble? Not even close. We’re at the early stages of people waking up to these cash flow kings as investments. Previously, only industry insiders were holding onto royalty streams. But new marketplaces are coming online, like Royalty Exchange, that provide a single place to trade these income streams. Energy.net has been around for 10 years and services the well established oil and gas royalty market.
But with those criteria, here are three royalty types that are very attractive.
- Music Royalties
When you hear a song on the radio – the writer is getting paid. But with over 15,000 radio stations in the U.S. and millions on streaming services like Spotify and Apple Music – these payments now add up to over $3 billion a year.
Plus, there are multiple payments for any one single song. The producer, publisher, songwriter and performer all get royalties. So you have several avenues to own some of your favorite songs.
- Alternative energy royalties
Oil and gas royalties (even gold mining royalties) are a prized asset to many smart investors. Those well established markets are giving way to newer energy sources like wind and solar. As energy companies and governments continue to invest in cleaner energy – the alternative energy market is poised for growth in the coming years.
It works pretty simply, after the initial build, landowners negotiate a Power Purchase Agreement (PPA) with the local energy company. They get paid for every watt of power they produce into the energy grid and let the sunny and windy days be their cash cow.
- Textbook royalties
Do you remember having to pay hundreds of dollars for textbooks every semester in college? Turns out, a lot of that money goes back to professors who helped write the textbook in royalty payments. They write a chapter or two on their specialty. In return, they get a royalty payment for each and every textbook that’s sold.
Not a bad deal is it?
Building a portfolio of these assets can make visits to the mailbox fun again.
It’s my guess you haven’t thought of these unique assets. But as you see, they each meet the criteria for high cash generating assets. There are many others; franchise development rights, licensing royalties, patent royalties. So this is just a primer.
If you want to begin following these types of assets, you can follow the new marketplaces like Royalty Exchange.
If this is a new asset class for you, I recommend you click here to view the educational material they have available for you.