Many people buy rental properties to start collecting passive income. They can be a great way to do this as the rental income can usually cover the costs and then some.
However, rental properties have their pitfalls. The big thing is that they are not accurate passive investments. Unless you hire a property manager, you will need to manage tenants and maintenance. Meanwhile, unplanned repair costs can quickly turn a rental property from a money maker into a money pit.
Therefore, those thinking of buying a rental property may consider buying shares in a real estate investment trust (REIT) instead. REITs allow anyone to invest in real estate to enjoy true passive income. Income from real estate (NYSE: O), Mid-America Apartment Communities (NYSE: EARTH)and Homes for invitations (NYSE: INVH) are great REITs to consider buying.
Your alternative to a rental property
Most first time real estate investors will buy a single family home to rent out. However, they have high upfront costs (the down payment and any necessary renovations to make the property ready for rent). Also, owning a property is risky because if the tenant unexpectedly moves out, you won’t have the rental income to cover the mortgage and other expenses.
Investing in Invitation Homes is a great alternative because it focuses on owning single-family rental homes. It owns or operates more than 100,000 of them in 16 fast-growing markets that benefit from strong demand. This gives you instant diversification. Meanwhile, investing in Invitation Homes won’t break the bank. You can buy just one share for about $35 apiece.
Each share you buy will entitle you to a quarterly dividend payment of $0.28 (about a 3.2% yield from the original price at the recent stock price). The more shares you buy, the more income you can make. For example, a $1,000 investment in Invitation Homes would yield about $32 in annual dividend income. That income should grow each year as the REIT increases its dividend, driven by rental growth in existing properties and the steady expansion of its portfolio. This gave investors an 8% increase last year.
Be a landlord
Mid-America Apartment Communities, MAA is another great alternative to buying a rental property. The REIT owns over 102,000 apartments in 16 states, primarily in the Sun Belt region.
The company is focusing on the fast-growing Sun Belt region because demand for housing is strong and growing. This regional focus allows it to take advantage of high occupancy rates, allowing it to steadily increase rents and develop new residential communities. These catalysts provide it with growing rental income to support its dividend.
The company has increased its dividend payout for 14 consecutive years, including by 5% at the end of last year. It costs about $130 to buy one share, which entitles the owner to $5.88 in dividend income each year (paid in quarterly installments of $1.47). That’s a 4.5% yield from the recent price.
A great REIT to collect passive income
Realty Income is a great REIT to buy for those looking for recurring income. It pays a monthly dividend of $0.257 per share ($3.078 on an annualized basis). That gives the REIT a 6% dividend yield at a recent price of about $52 per share. The company regularly increases its dividend. It has increased its payout 124 times since going public in 1994, including for the past 106 consecutive quarters.
A diversified REIT focuses on owning freestanding commercial properties net of lease of quality tenants in durable industries that are relatively resilient to economic downturns and the threat of e-commerce. These leases make tenants responsible for building insurance, maintenance and property taxes. These characteristics allow the REIT to generate a very steady stream of rental income to support its dividend.
Realty Income has an increasingly diversified portfolio. It owns retail, industrial, gaming, consumer-facing medical, vertical farming and data center properties in the US and Europe. It routinely invests in new profitable properties that increase its rental income, allowing it to steadily increase its dividend.
Easier ways to collect passive income from real estate
Rental properties can be a good way to earn extra income. However, income is not exactly passive, nor is it always stable. Therefore, those considering buying a rental property should consider whether investing in a REIT would be a better option. They allow you to collect truly passive income that is usually very stable and steadily grows over time.
Should you invest $1,000 in real estate income right now?
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Matt DiLallo holds positions with Invitation Homes, Mid-America Apartment Communities and Realty Income. The Motley Fool has positions in and recommends Invitation Homes, Mid-America Apartment Communities and Realty Income. The Motley Fool has a disclosure policy.
Thinking of buying a rental property in 2024? Consider Doing This Instead was originally published by The Motley Fool
