Real estate investment trusts enable you to generate truly passive income.
Buying a rental property is one of the more common ways to generate passive income. A good rental property will produce enough income each month to cover its expenses with room to spare.
However, rental properties have their pitfalls. The income isn't truly passive because you often need to actively manage the property, including finding the right one, securing a tenant, and then dealing with maintenance and other issues.
Meanwhile, they can be costly, with a high initial investment and the occasional unexpected large expense. Because of that, most people are better off forgetting about buying a rental property.
Investing in real estate investment trusts (REITs) is a better option. These entities own income-producing rental properties and distribute a portion of the income to investors via dividend payments. Here's a look at how much income you could generate each year by investing $50,000 across five high-quality REITs:
Dividend Stock | Investment | Current Yield | Annual Dividend Income |
|---|---|---|---|
Camden Property Trust (CPT 0.24%) | $10,000 | 4.4% | $440 |
Invitation Homes (INVH -0.14%) | $10,000 | 3.25% | $325 |
Realty Income (O -0.19%) | $10,000 | 5.91% | $591 |
Sun Communities (SUI -0.41%) | $10,000 | 2.84% | $284 |
W.P. Carey (WPC -0.38%) | $10,000 | 6.12% | $612 |
Total | $50,000 | 4.5% average | $2,252 |
Data source: Google Finance.
The great thing about REITs is that you don't need to invest a lot of money to get started, as many have share prices below $100. That enables you to slowly build your real estate empire (and passive income) as you have money to invest.
Here's a closer look at why these REITs are great options for those seeking to generate passive income from real estate.
Camden Property Trust
Camden Property Trust is a residential REIT focused on owning apartments. It currently owns 172 communities with 58,634 apartments across 15 high-growth markets, predominantly in the Sun Belt. Those properties produce steadily rising rental income to support Camden's growing dividend.
The REIT also invests money to build and buy apartment communities. It's currently investing $546 million into five projects to construct over 1,550 new homes (including building its first two single-family rental home communities).
Meanwhile, it has the land to develop over 3,350 more homes at an estimated cost of $1.4 billion. Camden will also buy operating communities and developable land as opportunities arise. These investments help grow its portfolio, rental income, and dividend.
The REIT pays $1.03 per share in dividends each quarter ($4.12 annually). It has increased its annual payout by around $1 per share since 2018, including by 3% earlier this year.
Invitation Homes
Invitation Homes is a residential REIT focused on single-family rental homes. It owns over 80,000 homes across 16 high-growth markets. Those units supply steadily rising rental income to support its growing dividend.
The REIT routinely acquires new rental homes. It has multiple acquisition channels, including partnerships with builders, joint ventures, and other sources. It has signed deals with large national homebuilders to acquire nearly 1,800 homes for $700 million over the next few years.
The company also recently launched a third-party management platform that will supply an increasing stream of management income and a pipeline of future acquisition opportunities. These drivers also support its growing dividend.
Invitation Homes currently pays $0.28 per share quarterly ($1.12 annually) in dividends. It has increased its payout every year since going public in 2017, including by 8% late last year.
Realty Income
Realty Income is a diversified REIT that owns retail stores (81.8% of its annual rent), industrial buildings (12.7%), gambling sites (3.9%), and other properties (1.6%). It has 15,450 properties around the U.S. and several European countries.
It leases these properties to high-quality commercial tenants under long-term net leases, which make the tenant cover building insurance, real estate taxes, and maintenance. Those agreements supply the REIT with very stable income that increases each year at a fixed rate or one tied to inflation.
The company invests billions of dollars each year to expand its portfolio. It will acquire other REITs, buy properties from operators via sale-leaseback transactions, and invest in build-to-suit opportunities. Realty Income estimates that rent growth and new investments will increase its adjusted funds from operations (FFO) per share by 4% to 5% per year.
Realty Income currently pays $0.2565 per share in monthly dividends ($3.078 annually). The REIT has increased its payout 123 times since going public, including by about 3% over the past year.
Sun Communities
Sun Communities is a residential REIT focused on owning manufactured home (MH) communities, RV parks, and marinas. It currently has 296 MH communities in North America, 55 holiday parks in the U.K., 179 RV communities, and 135 marinas. These properties generate stable and growing income.
Sun Communities invests money to expand its existing properties and buy new ones. Last quarter, the company expanded its existing communities by 30 sites and delivered more than 75 sites at one ground-up development property. It also purchased land to support a new MH development.
Sun Communities currently pays a dividend of $0.94 per share each quarter ($3.76 annually). It has steadily increased that payment throughout the years, including by 1.1% for 2024.
W.P. Carey
W.P. Carey is a diversified REIT that owns industrial and warehouse sites (59%), retail stores (21%), office buildings (5%), self-storage units (5%), and other properties (10%). It currently has 1,413 net lease properties and 86 operating self-storage properties. However, it's exiting the office sector. It's selling properties and reinvesting the proceeds into new ones, mainly in the industrial/warehouse sector.
The REIT provides properties to tenants under long-term net leases that escalate rents at a fixed rate or one tied to inflation. It also routinely acquires income-producing real estate. These catalysts should increase its rental income once it completes its strategic exit from the office sector.
After jettisoning most of its office properties, W.P. Carey reset its dividend to reflect its lower earnings. It currently pays $0.86 per share ($3.44 annually). However, that payout should rise in the future as it invests in new properties that grow its cash flow.
Truly passive income
Unlike rental properties, REITs supply truly passive income. They pay fixed dividends and try to increase them each year. Another great thing about REITs is that you can start small and slowly build your real estate portfolio and passive income as you buy more shares. That makes REITs great for beginning investors seeking to get on the road to financial freedom through passive income.
Matt DiLallo has positions in Camden Property Trust, Invitation Homes, Realty Income, Sun Communities, and W. P. Carey. The Motley Fool has positions in and recommends Camden Property Trust, Invitation Homes, Realty Income, and Sun Communities. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.
