Enjoying a steady stream of income without having to lift a finger is pretty much the dream, right? And if you're willing to dabble in real estate, it's more than possible to generate your fair share of passive income. That's money you can use to grow wealth for the future or access during your retirement years when you need to supplement your Social Security benefits.
Now there are different ways real estate investing can make it possible to generate passive income. One option is to load up on income properties, outsource their management, and sit back and collect rent payments.
But owning physical real estate carries risk. You need to maintain actual properties, which could grow increasingly expensive over time. And also, there's a chance that your income properties could end up sitting vacant for a period of time. The result? No income for you. A perhaps less risky way to generate passive income via real estate investing, therefore, is to hold a diverse mix of real estate investment trusts (REITs) in your portfolio.
The upside of REITs
REITs are companies that own and operate different types of properties. REITs typically focus on a specific type of property (though there are also diversified REITs, which own different types of properties).
Industrial REITs, for example, are those that operate warehousing space and fulfillment centers. Healthcare REITs, on the other hand, operate facilities such as hospitals and urgent care centers.
The great thing about REITs is that they're required to pay at least 90% of their taxable income to shareholders as dividends each year. And often, they'll end up paying more. Those dividends can then be cashed out if that need exists. Or they can be reinvested to help you grow additional wealth.
Of course, REITs aren't your only option for generating dividend income. You could turn to regular dividend-paying stocks as well. But since REIT dividends tend to be higher than average, they're worth looking at. Also, if you don't have any real estate stocks in your portfolio, REITs could lend to a nice amount of diversification.
What about the risks?
REITs aren't a risk-free prospect. Just as shares of regular stocks can lose value, so too can REIT shares lose value if market conditions deteriorate. But if you choose your REITs carefully, you can limit your risk to some degree.
Right now, for example, office REITs are a somewhat risky prospect due to the potential for remote work to become permanent across many industries. So that's an area you may not want to dabble in right now. On the other hand, residential REITs, which own properties like apartment complexes, are enjoying a boom as rental demand soars. So those REITs may be a better place to put your money.
All told, REITs are a great option for generating passive income due to their generous dividends. And so, it pays to make room for them in your portfolio, especially if you're looking to branch out into real estate but don't want to own actual properties.