Investing in real estate is one of the many ways to start making passive income. Many real estate investors will buy a rental property.
That strategy has its benefits and drawbacks. Among the cons is that it isn’t the easiest way to generate passive income from real estate. You need to find tenants and manage the property, which isn’t exactly passive.
There are much easier ways to invest in real estate. One super easy option is to invest in a real estate investment trust (REIT). These entities own a portfolio of income-producing properties, enabling them to pay lucrative dividends.
There are many great REITs, several of which focus on different property types. Three top options for beginners are Invitation Homes (INVH -0.21%), Realty Income (O -0.16%), and Extra Space Storage (EXR -1.30%).
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The easy way to be a landlord
Many investors get their start in real estate by buying a single-family home and turning it into a rental property. That strategy can produce an attractive rental income stream. However, there are many drawbacks, including the high up-front costs of buying a property, which typically limits beginners to purchasing one property in a single market.
A much easier and lower-cost way to collect income from single-family rental properties is to buy shares of Invitation Homes. The residential REIT owns nearly 93,000 homes across 16 high-growth housing markets. On top of that, it manages more than 17,000 additional homes for other real estate investors.
This diversified portfolio produces stable and growing rental income. That supports the REIT’s 3.3%-yielding dividend. Every $100 invested in the REIT would deliver about $3.30 of annual dividend income at that rate.
Invitation Homes steadily expands its portfolio by purchasing additional rental homes. It has contracts to buy about 2,000 homes directly from leading builders. It will also buy homes from other investors and on the open market. These new investments enable the REIT to grow its rental income even faster. That has allowed it to steadily increase its dividend, which it has done every year since it went public in 2017.
The name says it all
Realty Income is a quintessential REIT for collecting passive income. The company pays a monthly dividend that currently yields 5.6%. That high rate enables investors to generate more income from every dollar they invest.
The company owns a diversified portfolio (retail, industrial, gaming, and other properties) net leased to many of the world’s leading companies. Net leases produce very stable rental income because tenants pay all operating expenses, including routine maintenance, real estate taxes, and building insurance.
Realty Income has a terrific record of growing its dividend (30 straight years and the last 110 quarters in a row). It’s able to increase its dividend by purchasing additional income-generating properties. The REIT has a very strong financial profile, which allows it to invest billions of dollars each year to grow its portfolio.
Extra-sized dividend growth
Extra Space Storage offers a 4.3% dividend yield. The leading self-storage REIT has grown its dividend by nearly 190% over the past 10 years.
Several factors have driven Extra Space Storage’s ability to hike its dividend. For starters, self-storage properties tend to produce durable and growing rental income due to rising demand for self-storage space. The company has also built the industry’s largest third-party management platform, providing it with additional stable income sources. On top of that, Extra Space has made several acquisitions over the years, including buying Life Storage in 2023 to become the U.S. self-storage leader.
Extra Space is in an excellent position to continue increasing its dividend. Its growth drivers include rental increases; acquisitions (from unrelated third parties, joint venture partners, and managed properties); expanding its management platform; and originating bridge loans to self-storage developers. These growth drivers should enable the REIT to continue expanding its portfolio, income, and dividend payment.
Sit back and watch the passive income flow into your account
REITs make it super easy to generate passive income. You just buy shares and then watch the income hit your account like clockwork. More often than not, that income stream will steadily rise as the REITs grow their rental income. That makes them effortless ways to make passive income.
Matt DiLallo has positions in Invitation Homes and Realty Income. The Motley Fool has positions in and recommends Invitation Homes and Realty Income. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.
