Most of us work for money, actively trading our time, knowledge, or skills for cash. If you don't work, you don't earn. But what if I told you there was another way? One that doesn't requires active participation to earn an income. Rather, your money could generate even more money through passive income.
Making passive income is one of the cornerstones of building wealth, and thankfully it's more accessible than ever before through strategic investments in things like real estate, stocks, and bonds. Most people think you need money to start earning passive income, which is true in a sense. But you don't really need that much money to start making passive income today.
In fact, there are several low-cost, up-front investments that can generate a lot of passive income down the road.
An affordable way to generate passive income today
Real estate is one of the best ways to earn passive income. Rental real estate, in particular, is a great passive income stream because after the property is rented, income is earned each month with minimal participation from you. However, buying physical real estate does require a notable sum of money for a down payment on a loan.
Luckily, if you're tight on funds and only have a few thousand or a few hundred dollars to invest, you can still participate in passive real estate investing by purchasing shares of a real estate investment trust (REIT). A REIT is a special type of stock that actively owns, leases, or invests in real estate and real estate-related equities. This can range from single-family rental properties to retail strip centers, malls, mortgages, hospitals, and self-storage facilities, among countless other types of properties.
The REIT is responsible for the management and leasing of its portfolio paying dividends to its shareholders. And since REITs are required to pay at least 90% of taxable income in dividends to benefit from special tax incentives, REITs are a super reliable passive income stream.
How much you need and how much you can earn
REITs don't require a huge up-front investment to start earning. Since you can purchase shares of a REIT through a brokerage account, how much you spend is entirely up to you. The cost of the REIT will vary greatly from company to company, but there are several REITs that can be purchased for under $25 a share. Others can cost several hundred dollars per share.
For example, Invitation Homes (INVH 0.70%), which invests in single-family rental housing, and National Retail Properties (NNN -0.66%), which owns and leases single-tenant retail space, can both be purchased for under $45 per share. Innovative Industrial Properties (IIPR -0.17%)(IIP), which buys and leases industrial real estate to licensed medical marijuana operators, is slightly more expensive, currently trading at around $135, but recent volatility has pushed its price down 50% year to date, making its dividend return to an attractive 4.5% yield.
If you're starting with a small investment, the dividend income earned from a REIT might not seem like much at first, but dividend increases can help your small amount become much larger over time. I originally purchased 32 shares of IIP in 2018 for an investment of just under $1,000. At first, I only earned $0.25 per share, around $8 per quarter. But thanks to the 12 dividend raises it's made since my initial investment, my roughly $1,000 investment now earns me $1.75 per share or $56 per quarter.
It's important to emphasize that share price or high dividend returns shouldn't be the only deciding factors for buying a REIT. Rather, the fundamentals of the company, its current operations, and its future growth opportunities should be the bigger deciding factors. Thankfully there are loads of high-quality REITs to choose from that can meet almost any investment budget.
