Right now is the right time to consider real estate investing. Despite rising interest rates and soaring prices, taking a stake in real property remains a long-term path to prosperity and deserves consideration in any portfolio. There are numerous ways to get involved, including physically buying and owning property, either to rent or flip. That takes a lot of money and time, though, especially if you're directly managing a rental property or two.
But you don't have to be that active. Investors can enjoy a lifetime stream of passive income by choosing instead to invest in properties managed by other people.
For my money, the best place to plunk down your first $5,000 in real estate investing would be in a publicly-traded real estate investment trust (REIT).
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Why REITs are a great place to start
These companies own portfolios of income-producing properties and operate in nearly every industry, including mobile towers, malls, multifamily and single-family rentals, industrial warehouses, self-storage, farm and timberland, and offices.
Because they're publicly traded, they also provide liquidity and reporting transparency, and REITs are required by tax law to distribute at least 90% of their taxable income to their shareholders. That makes them a steady source of income, and among the 225 or so publicly traded REITs, there are a lot of attractive choices for that $5,000 you're looking to invest in real estate.
One good example is one of the most widely held: Realty Income (O -0.02%). Based in San Diego, this REIT specializes in freestanding, single-tenant commercial properties operating through triple-net leases, which means the tenant is responsible for taxes, insurance, and maintenance.
Realty Income boasts a portfolio of more than 11,000 properties in the United States, United Kingdom, and Spain, with a roster of more than 1,040 clients led by a who's who of retailers such as Walgreens, Dollar General, and 7-Eleven.
This REIT is one of a handful that pays dividends monthly; it is currently yielding about 4% after recently raising that dividend to $0.247 per share while it builds on its record of having now paid a dividend for 622 straight months.
And in the past 10 years, as the chart below shows, Realty Income has provided a total return well above that of the Vanguard Real Estate Income ETF (NYSE:VNQ), an index fund of REITs that includes Realty Income as one of its 168 holdings.
O Total Return Level data by YCharts
Compounding your interest in this investing channel
So, about that $5,000. Say that investment in Realty Income continues to produce a yield of 4% annually for five years. Through the magic of compounding, your $5,000 stake has grown to $6,083. Ten years, and it's worth $7,401. And that's without adding any more to the original investment, but also not taking anything out, either.
That also doesn't take into consideration share price changes. If the price goes down, the yield goes up. If the price goes up, the yield goes down. The dividend goes its own way, and Realty Income's has generally been up. The chart below shows how Realty Income's stock price has grown along with its dividend over the past five years.
I don't personally own Realty Income stock now, but I have before and I might again. I do have several other REITs in my portfolio, including healthcare, industrial, and mortgage REITs. Their mix of income and capital growth potential and the ability they give you as an investor to focus on an industry sector that you believe has good prospects makes them a good option for retirement investing -- which is where I'm at now -- as well as a good place to plunk down your first $5,000 in real estate investing.
