Many people purchase rental properties to start collecting passive income. They can be a great way to do that, as the rental income can usually cover the expenses and then some.
However, rental properties have their pitfalls. A big one is that they're not exactly passive investments. Unless you hire a property manager, you'd have to manage tenants and maintenance. Meanwhile, unplanned repair costs can quickly turn a rental property from a moneymaker into a money pit.
Because of that, those thinking about buying a rental property might want to consider purchasing shares in a real estate investment trust (REIT) instead. REITs enable anyone to invest in real estate to enjoy truly passive income. Realty Income(NYSE: O), Mid-America Apartment Communities(NYSE: MAA), and Invitation Homes(NYSE: INVH) are great REITs to consider buying.
Your rental-property alternative
Most beginning real estate investors will buy a single-family home to rent out. However, these have a high upfront cost (the down payment and any needed repairs to make the property rent-ready). On top of that, owning a single property is risky because if the tenant unexpectedly moves out, you'll have no rental income to cover your mortgage and other expenses.
Investing in Invitation Homes is a great alternative because it focuses on owning single-family rental homes. It owns or manages over 100,000 of them across 16 high-growth markets, which benefit from strong demand. That gives you instant diversification. Meanwhile, investing in Invitation Homes won't break the bank. You can buy as little as one share for around $35 apiece.
Each share you buy would entitle you to a quarterly dividend payment of $0.28 (about a 3.2% yield on the initial cost at the recent share price). The more shares you buy, the more income you can make. For example, a $1,000 investment in Invitation Homes would produce about $32 of annual dividend income. That income should rise each year as the REIT increases its dividend, driven by rent growth across its existing properties and the steady expansion of its portfolio. It gave investors an 8% raise last year.
Be the landlord
Mid-America Apartment Communities, MAA is another great alternative to buying a rental property. The REIT owns over 102,000 apartment units across 16 states, predominately in the Sun Belt region.
The company focuses on the fast-growing Sun Belt region because the demand for housing is strong and growing. This regional focus enables it to benefit from high occupancy levels, which allow it to steadily increase rents and develop new apartment communities. Those catalysts provide it with growing rental income to support its dividend.
The company has increased its dividend payment for 14 straight years, including by 5% late last year. It costs about $130 to buy one share, entitling the owner to $5.88 of dividend income each year (paid in quarterly installments of $1.47). That's a 4.5% yield on the recent price.
A great REIT for collecting passive income
Realty Income is a splendid REIT to buy for those seeking recurring income. It pays a monthly dividend of $0.257 per share ($3.078 annualized). That gives the REIT a 6% dividend yield at the recent price of around $52 per share. The company routinely increases its dividend. It has raised the payout 124 times since its public market listing in 1994, including for the last 106 straight quarters.
The diversified REIT focuses on owning free-standing commercial properties net leased to quality tenants in durable industries that are relatively resilient to economic downturns and the threat of e-commerce. Those leases make the tenants responsible for building insurance, maintenance, and real estate taxes. These features enable the REIT to generate a very stable rental income stream to support its dividend.
Realty Income has an increasingly diversified portfolio. It owns retail, industrial, gaming, consumer-centric medical, vertical farming, and data center properties across the U.S. and Europe. It routinely invests in new income-producing properties, which grow its rental income, allowing it to steadily raise its dividend.
Easier ways to collect passive income from real estate
Rental properties can be a good way to make some additional income. However, the income isn't exactly passive, nor is it always stable. Because of that, those considering buying a rental property should evaluate whether investing in REITs would be a better option. They enable you to collect truly passive income that's typically very stable and steadily rises over time.
Should you invest $1,000 in Realty Income right now?
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Matt DiLallo has positions in 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.
