Many people dream of owning a portfolio of rental properties that can produce enough passive income to cover their living expenses. That could enable them to retire early or spend less time working, giving them more freedom.
That was once my goal. However, I've found a much easier way to make passive income from real estate. My strategy is to invest in real estate investment trusts (REITs) and other real estate investments that don't require me to manage rental properties. REITs enable me to avoid the stress and related work of having to find a qualified tenant and manage the property or the expenses of hiring a property manager. I just sit back and watch the passive income flow into my brokerage account.
Here are a couple of top REITs to consider investing in before you go down the path of purchasing your first rental property in 2025.
Your rental property replacement REIT
Most rental property investors start by purchasing single-family homes they rent out for income. That strategy has its benefits and drawbacks. Lack of diversification is a big negative. It's expensive to buy a single-family home, which limits the size of your portfolio. If you own one property and it experiences an unexpected vacancy, your rental can quickly go from a money maker to a money pit. Further, managing rentals outside your local market isn't easy.
That's why I prefer investing in Invitation Homes(NYSE: INVH). The residential REIT owns or manages over 110,000 single-family homes in 16 markets. That provides investors diversified exposure to the top metro markets in the country.
Invitation Homes focuses on metro areas benefiting from above-average job and population growth rates. That drives demand for rental housing, keeping occupancy levels high and rental rates rising. As a result, Invitation Homes' rental properties have delivered steadily increasing income.
The REIT has also steadily expanded its rental property portfolio over the years by acquiring homes from a variety of sources, including directly from builders. For example, it has partnered with several leading builders that are currently constructing 2,500 homes for the REIT.
Invitation Homes has also expanded its in-house property management capabilities to manage properties owned by other investors. This business supplies additional income from management fees and creates a pipeline of future acquisition opportunities.
The REIT's growing income has enabled it to pay a steadily rising dividend. It currently pays investors $0.29 per share each quarter ($1.16 annually), which it recently increased by 3.6%. That's a nearly 3.7% yield on its recent share price in the low $30s. At that rate, every $100 invested into Invitation Homes would produce about $3.70 of passive dividend income each year.
Built to produce passive income from real estate
Another common rental property is a free-standing commercial building leased to a single tenant. These properties can range from a small retail property to a larger industrial or office building. They tend to provide very stable rental income secured by a long-term lease, often triple net (NNN). That lease structure requires the tenant to cover a property's operating costs, including routine maintenance, building insurance, and real estate taxes. A drawback to investing in these properties is that commercial buildings require a much bigger investment, making it even more challenging to build a diversified portfolio.
That's why I like investing in Realty Income(NYSE: O). The diversified REIT owns 15,450 properties across the U.S. and parts of Europe. Its portfolio includes retail (79.4% of its rent), industrial (14.6%), gaming (3.2%), and other properties (2.3%) leased to some of the world's leading companies.
That portfolio produces very stable rental income. Realty Income uses it to pay a monthly dividend ($0.264 per share or $3.162 annualized) that currently yields 6% on its low-$50 share price.
The REIT routinely increases its dividend payment. It recently delivered its 128th increase since going public in 1994. It has raised its dividend every single year and for the last 108 quarters in a row. Overall, it has grown its payout at a 4.3% compound annual rate.
Realty Income's dividend should continue rising. Its rents grow at a low single-digit rate each year. On top of that, the REIT routinely acquires additional income-producing properties.
Great rental property replacements
I think investing in REITs is a better way to make passive income from real estate than buying a rental property. They offer instant diversification, and you don't have to manage them. Because of that, you can just relax and enjoy receiving the truly passive income they produce.
Should you invest $1,000 in Realty Income right now?
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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 has a disclosure policy.
