There's only so much time in a day. That puts some limits on your ability to generate active income by making money from your job or a side hustle. Because of these limits, it's harder to boost your active income. You'd need to switch careers, work harder, or spend more time working.
On the other hand, many passive income opportunities only require money. That allows you to take some of your hard-earned active income and make that money work for you.
One of the easiest ways to start generatingpassive incomeisinvesting in real estate. And one of the lowest-cost ways to start is by investing in real estate investment trusts (REITs). Here's how to use REITs to turn $1,000 into a steadily rising passive income stream.
Image source: Getty Images.
REITs: The perfect way to start generating passive income
Congress created REITs in the 1960s to allow anyone to invest in income-producing commercial real estate. These entities must generate the bulk of their income from real estate, 90% of which they must distribute to investors viadividend payments. This means REITs have historically offered attractive income streams. For example, the average REIT currently has a dividend yieldof more than 3%, double that of the average stock in theS&P 500.
Four great REITs for passive income
There are over 200 publicly traded REITs. That can make deciding which ones to buy a daunting challenge. However, a handful of REITs stand out for their proven ability to produce a growing dividend income stream. Four of my personal favorites for generating passive income areAvalonBay Communities(AVB -0.53%),Realty Income(O 0.50%),W.P. Carey(WPC -0.21%), andSL Green Realty(SLG 0.74%).
AvalonBay is a leading residential REIT focused on owning apartments in some of America's biggest and fastest-growing cities. While the REIT hasn't increased its dividend every year, it has grown it at a 5% annual rate since its initial public offering (IPO) in 1994. Moreover, apartments tend to be relatively low-risk real estate investments, driven by the growing demand for housing. AvalonBay is one of the sector's best operators, with a high-quality portfolio in great locations and a top-notch financial profile.
Realty Income is a passive income-generating machine. It pays amonthly dividendthat it has increased for more than 25 straight years, qualifying it as aDividend Aristocrat. Overall, it has given investors a raise 114 times since its IPO, including in the last 97 consecutive quarters, growing the dividend at a 4.5% compound annual rate. The retail REITowns a diversified portfolio of essential retail buildings (e.g., grocery, home improvement, and convenience stores) and industrial properties. It also has a top-notch balance sheet.
W.P. Carey has increased its dividend every year since its IPO in 1998. The REIT owns a diversified portfolio that includes offices, warehouses, manufacturing facilities, self-storage, retail, and many other properties. It leases these buildings to high-quality tenants under triple net contacts, making them responsible for building maintenance, real estate taxes, and property insurance. These factors enable W.P. Carey to generate steady rental income.
SL Green is Manhattan's largest office landlord. Theoffice REIT owns some of the best office buildings in the Big Apple, leased to high-quality tenants. While the office sector took a hit during the pandemic, businesses still view the office as essential to their operations. Because of that, SL Green has continued to sign new and renewal leases for its spaces. The office REIT also has a long history of growing its dividend, recently delivering its 11th annual increase.
One small step toward passive income freedom
Now that we've covered these REITs, here's a look at what the passive income stream would look like if you invested $1,000, split evenly across these four:
REIT | Current Dividend Yield | Projected Annual Income |
|---|---|---|
AvalonBay Communities | 2.5% | $6.35 |
Realty Income | 4.2% | $10.38 |
W.P. Carey | 5.3% | $13.28 |
SL Green | 4.6% | $11.43 |
Total | 4.1% | $41.43 |
Data source: Google Finance and author's calculations.
Now, I know what you might be thinking: $40 isn't a lot of money. However, don't despise small beginnings. You wouldn't have to work for this money, and it's a lot more than you'd earn if that cash sat in a checking or savings account, given how low interest rates are these days.
More importantly, it's the start of what could eventually become an even greater passive income stream in the future. These REITs have a long history of growing their dividends each year. Further, if you reinvest those dividendsinto buying more shares and use more of your hard-earned money to purchase passive income-producing assets, it can add up over time.
Begin building passive income today
By starting to collect passive income today, you can eventually free up some of the time you currently spend earning active income. While it won't happen overnight, in time, you can build a passive income portfolio that throws off a meaningful amount of cash. The key is that you need to start, and investing $1,000 across these REITs is a great way to begin.
Matthew DiLallo owns AvalonBay Communities, Realty Income, SL Green Realty, and W. P. Carey. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
