If someone were to pay you $1,000 or more a month to sit on your couch and do nothing, you’d probably take the gig, right? After all, there’s nothing better than getting to earn money without having to lift a finger.
If that idea sounds good to you, here’s something you should know. Investing in real estate could be your ticket to generating $1,000 or more per month in passive income.
Now, if you’re thinking “Wait a minute — I don’t want to go out and purchase a rental property” — I wouldn’t blame you. While an income property could be a great way to generate ongoing cash, it’s easy to argue that managing a rental really isn’t passive income, because you’re doing the job of a landlord for what could be many hours a week.
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And besides, owning physical real estate carries risk. You could incur thousands of dollars in damage if a tenant wrecks your home. Or a weather event could leave you on the hook for countless repair bills.
That’s why REITs really are a much better source of passive income within the realm of real estate. And so if you like the idea of sitting back, doing nothing, and making money, then it pays to add them to your portfolio.
The benefit of REITs
REITs, or real estate investment trusts, are companies that make money by operating portfolios of properties. Industrial REITs, for example, own warehousing space they can lease out to generate revenue.
When you invest money in REITs, you get to buy into real estate without owning any property yourself. That means you don’t directly assume the same risks you’d face if your name were on the deed to a house or building.
Meanwhile, the benefit of REITs is that they offer you two ways to make money. First, your REIT shares could gain value over time, the same way that can happen when you buy regular stocks. But the second way you can make money is via dividend payments, and that’s where the whole passive income thing comes in.
REITs are required to pay at least 90% of their taxable income to shareholders as dividends. As such, they tend to pay higher dividends than most stocks.If you load up on REITs, you may reach the point where your portfolio is generating $1,000 or more per month of dividend income. And from there, all you need to do is decide what to do with it (hint: reinvesting is probably your best bet). Compare that to the many tasks involved in owning a rental property, and it’s easy to see why REITs are an ideal choice.
As an example, Medical Properties Trust Inc (NYSE: MPW) has a dividend yield of 8.61%. Now dividend yields can change over time, so you can’t get too comfortable with any one specific number. But still, let’s assume that the company is able to sustain that dividend. If you were to buy 10,500 shares, you’d end up with monthly dividend income of just over $1,000.
To be clear, it’s probably not a good idea to buy that many shares of a single REIT. The point, however, is that it’s possible to find REITs with generous dividends, and if you assemble a nice mix of them across a range of market sectors, you can enjoy that passive income plus added diversity in your portfolio.
Of course, REITs have their downsides. For one thing, all of that dividend income could create a huge tax liability for you (assuming you hold your REITs in a regular brokerage account and not a tax-advantaged account, like an IRA). And market or economic conditions could impact the value of your REIT shares (mall REITs, for example, took a beating in 2020 when stores closures exploded in the wake of the pandemic).
If your goal is to generate steady income without exposing yourself to too much risk, you may want to focus on REITs that are more likely to be recession-proof, like healthcare REITs. But again, branching out into different market sectors is probably your best bet on a long-term basis.
All of the upside, none of the work
While there are different steps you can take to set yourself up with passive income, it pays to look at REITs if you really want to take the easy way out. And to be clear, that doesn’t make you lazy. If anything, it makes you a savvy investor who knows how valuable their time is.
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Maurie Backman has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.