Enjoying a steady stream of income without having to move a finger is pretty much a dream, isn’t it? And if you want to get involved in real estate, it can generate your fair share of passive income. This is money that you can use to grow wealth for the future or access it during your retirement years when you need to supplement your Social Security benefits.
Now there are different ways that real estate investing can provide to generate passive income. One option is to load the income property, outsource its management, sit back and collect the rent payments.
But owning physical real estate carries risks. You need to maintain the actual property, which can increase in cost over time. Also, there is a chance that your income property will end up vacant for a while. Results? You have no income. Perhaps the least risky way to generate passive income through real estate investing is to keep a diversified mix of REITs in your portfolio.
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The upside of REIT
Real estate investment trusts are companies that own and manage different types of real estate. REITs usually focus on a specific type of property (although there are various REITs, which hold different types of real estate).
Industrial REITs, for example, are those that manage storage spaces and fulfillment centers. On the other hand, healthcare REITs operate facilities such as hospitals and urgent care centers.
The great thing about REITs is that they have to pay at least 90% of their taxable income to shareholders as dividends each year. They often end up paying more. These profits can then be disbursed if such a need exists. Or it can be reinvested to help you grow additional wealth.
Of course, REITs are not your only option for generating income from dividends. You can also turn to common stock that pays dividends. But since REIT earnings tend to be above average, it’s worth looking into. Also, if you don’t have any real estate stocks in your portfolio, REITs can lend a lot of diversification.
What about the risks?
REITs are not a risk-free prospect. Just as common stocks can lose value, so can REITs lose value if market conditions deteriorate. But if you choose your REITs carefully, you can reduce the risks to some extent.
Currently, for example, office REITs are a somewhat risky prospect given the potential for remote work to become permanent in many industries. So this is an area you may not want to get involved in right now. On the other hand, residential REITs, which own real estate like apartment complexes, are enjoying a boom with high demand for rents. So these real estate funds may be a better place to put your money.
Finally, REITs are a great option for generating passive income due to their generous dividends. Thus, it pays to make room for them in your portfolio, especially if you are looking to branch out into real estate but don’t want to own actual real estate.
