Owning rental properties can be a great way to make passive income. However, they do have their drawbacks. The upfront cost can be prohibitive to beginners. Meanwhile, they aren't always passive investments. You might need to do some work to find and manage tenants and contractors to handle repairs.
One option you should consider beyond buying a rental property is investing in real estate investment trusts (REITs). They allow anyone to own income-producing commercial real estate. REITs have a much lower upfront investment (you can buy shares for less than $100). They also allow you to generate truly passive income from real estate. Here's a look at some great REITs to consider for passive income.
The easy way to be a landlord
Many people who buy real estate to generate passive income purchase a single-family home they'll rent to a tenant. However, it can cost tens of thousands of dollars to buy a rental property when adding in the down payment, closing costs, and any repairs needed to get the home ready to rent. That high up-front cost can put a rental property out of reach for many people.
An alternative is to buy shares of a REIT focused on owning single-family rental homes. The leader in that space is Invitation Homes (INVH -0.29%). The residential REIT owns over 80,000 homes across the country in desirable markets. The company generates steadily growing rental income, allowing it to pay an attractive dividend to its investors.
Invitation Homes currently offers a 2.8% dividend yield. That implies every $1,000 invested in Invitation Homes would produce about $28 of annual passive income. It's also worth noting that the REIT has an excellent track record of growing its dividend, including boosting it by nearly 30% this year. With a growing portfolio of rental properties generating rising rental income, Invitation Homes should be able to provide investors with a steadily increasing passive income stream in the future.
A similar option is to buy a REIT focused on owning apartment communities. Among the several excellent options include Camden Properties Trust (CPT -0.60%). The REIT currently owns 171 properties with 58,433 apartment homes across 15 markets. Camden focuses on high-growth locations, enabling it to benefit from above-average rent growth. The apartment owner pays an attractive dividend -- it currently yields 3.3% -- that has steadily increased over the years. Camden should be able to continue growing its payout in the future, driven by rising rents, apartment acquisitions, and development projects.
Become a mini real estate mogul
REITs own many other property types beyond residential. That enables investors to build a more diversified portfolio for producing passive income. Realty Income (O -0.02%) and W. P. Carey (WPC -0.84%) are great options.
Realty Income owns over 11,700 properties across the U.S. and Europe leased to nearly 1,150 tenants in about 80 different industries. The bulk of its portfolio (78%) consists of retail properties resilient to economic disruptions and the pressures of e-commerce, like grocery stores, home improvement stores, pharmacies, and convenience stores. The rest of its portfolio are non-retail properties with the same feature (warehouses, manufacturing, and gaming) and other retail properties like theaters. Overall, Realty Income generates stable rental income to support its 4.7%-yielding dividend. It pays a monthly dividend, making it ideal for passive income. The REIT has a long track record of increasing its dividend (100 straight quarters), which seems likely to continue as Realty Income acquires more income-producing real estate.
W. P. Carey has an even more diversified real estate portfolio. It owns over 1,400 properties across the warehouse, industrial, office, retail, and self-storage sectors. It's well diversified by tenant, property type, tenant industry, and geographic location (U.S., and Northern and Western Europe). These properties generate very steady rental income backed by long-term leases to support W. P. Carey's 5.4%-yielding dividend. The diversified REIT has increased its payment yearly since its public market listing in 1998. That upward trajectory seems likely to continue as W. P. Carey benefits from rising rental rates and a steadily growing real estate portfolio.
Great ways to start making passive income
While rental properties enable their owners to collect passive income, REITs are often better for beginners. They have a much lower up-front cost and allow instant diversification across many properties, property types, and geographies. Because of that, passive income seekers should look beyond rental properties to the benefits of owning REITs.