NEW YORK (TheStreet) -- Once upon a time, I owned an apartment building with 15 residential rental units. I hired a property manager to deal with the residents and keep an eye on the upkeep of the building and grounds. She charged me 7% of the gross total rent.What I didn't understand was that some property managers make money by doing the maintenance and repairs themselves (through their employees) and billing it as a way of making a profit. For instance, one of the apartment air conditioners stopped working. The property manager called and asked me if her crew could fix it. I asked, "How much will it cost me?" She said, "I'll let you know." A few days later she called and said it could be replaced for $300 and repaired for $200. I said, "Repair it." Two weeks later I did my own belated investigating and discovered I could have repaired it myself for $100. When I wasn't negotiating with the property manager (I fired the first one and hired another) I was constantly concerned with filling vacancies and dealing with the usual renter problems. My net annual rate of return (cap rate) never exceeded 8%, and I had to tie up a lot of my investment capital in the ownership of the apartment complex. Thankfully, I was contacted by an international investment group that wanted to buy my building, for a small profit. It was a good learning experience and it helped me to remember there are smarter ways to derive income from residential or commercial properties without the headaches of ownership. As Dr. Steve Sjuggerud, the editor of the popular DailyWealth publication, has pointed out to subscribers: "When you can buy the best properties in the world and collect large amounts of rental income, it's probably the safest and most lucrative investment you could ever make. "The risks are low... your money is invested in something real and tangible (the valuable property)... and the rental income and capital gains can make you wealthy, especially if you buy at the right price." That has been my experience as well, IF, you buy the shares of an experienced real estate company at a reasonable price per share. Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust. Enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements. So I began accumulating shares of undervalued, well-managed real estate investment trusts that offered at least a 5% dividend from the company's funds from operations, or FFO. One that I bought in November at $9.51 a share is Lexington Realty Trust ( LXP - Get Report). As of January 8, 2013 LXP closed at $10.76-a-share. With its 60 cents annual dividend the current yield to price is close to 5.6%. When I purchased at $9.51 the yield to price was 6.3%, and because I waited for the price I wanted my shares are now up 13%. I'm not bragging, just pointing out how well this process can work for the prudent, patient investor.
When it comes to the future success of a REIT, I like to see the balance sheet. Lexington financed an office property in Palo Alto, Calif., with a $59.5 million non-recourse mortgage loan, which bears interest at a fixed rate of 3.97%. The lower the borrowing cost the higher the net operating funds.
The free cash flow improved in the last quarter of 2012 yet the shares dipped when SIR priced a public offering of 7,000,000 common shares at a price of $24.00 per share. Since then the share price has rebounded 3.83% to $24.92. SIR remains one of the most attractively priced REITs today. At the time of publication the author had positions in all the stocks mentioned. Follow @m8a2r1 This article was written by an independent contributor, separate from TheStreet's regular news coverage. Most large-cap stocks were once small and mid-cap stocks. Bryan Ashenberg is here to help you find the cream of the crop amongst the market chaos.