Buying a rental property offers the promise of passive income. In theory, the tenants will pay more than enough rent to cover the property’s expenses, enabling the landlord to pocket the difference in passive income. In addition to that income, rental property owners can capture tax benefits and property price appreciation.
However, rental properties have their drawbacks. The up-front cost can be well over $100,000 when factoring in the down payment, closing costs, and any repairs needed to make the property ready to rent. Meanwhile, the income isn’t always passive since you need to manage the property and the tenants. On top of all that, an unexpected vacancy or repair can turn a rental property from a money maker into a money pit.
There are many alternative ways to generate passive income from real estate. An easy option is to invest in a real estate investment trust real estate investment trust (REIT). These low-cost vehicles enable anyone to collect income backed by real estate. Here are two top REITs to consider.
The lazy way to be a landlord
Many real estate investors start by owning residential rental properties. They buy single-family homes or duplexes and rent them out to tenants.
While being a landlord can be profitable, an easier way to generate passive income from rental housing is to invest in a residential REIT. There are many great ones, including Camden Property Trust (NYSE: CPT). The company owns 171 communities with over 58,000 rental units in 15 major U.S. markets. It focuses on markets where jobs and the population are growing at above-average rates. That drives demand for housing, keeping occupancy high and rental rates rising.
Camden’s rental property portfolio supplies it with steadily rising income to pay dividends. The REIT currently pays a quarterly dividend of $1.03 per share ($4.12 annually). With a share price recently around $110, Camden has a dividend yield of around 3.8%. At that rate, every $1,000 invested into Camden would generate about $38 of annual passive income.
The REIT’s dividend payments should steadily rise in the future, driven by rent growth and the company’s expanding portfolio. Camden has four new communities under development, including its first two build-to-rent single-family communities. It has the land to build nine more communities, giving it plenty of room to continue growing.
Build to produce passive income
One of the great things about REITs is that they open the door to investing in many types of rental properties. For example, Realty Income (NYSE: O) owns a diversified portfolio of commercial real estate, including retail, industrial, gaming, and data center properties. The REIT owns 15,540 single-tenant properties across all 50 states, the U.K., and six other European nations.
Those properties supply it with very stable rental income that it uses to pay dividends. Realty Income pays a monthly dividend of $0.263 per share ($3.156 annually). With its share price recently around $53, it had a dividend yield of about 5.9%.
Realty Income has an exceptional record of increasing its dividend. Since going public in 1994, it has raised its payout 126 times, including for the last 107 straight quarters.
The main factor driving that growth is a steady diet of acquisitions. The REIT routinely purchases properties from its operators in sale-leaseback transactions. It will also acquire other REITs and fund development projects. Given that there are trillions of dollars of commercial real estate that it could acquire in the future in its core markets, it has a long growth runway ahead.
Easy ways to generate passive income from real estate
Buying a rental property can be a great way to collect passive income. However, this approach has drawbacks, including a high up-front cost and the need to manage tenants and repairs. REITs provide passive income without those disadvantages, making them ideal options for many beginners. Realty Income and Camden Property are among the best, making them great REITs to buy if you’re looking for passive income.
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Matt DiLallo has positions in Camden Property Trust and Realty Income. The Motley Fool has positions in and recommends Camden Property Trust and Realty Income. The Motley Fool has a disclosure policy.
Thinking About Sinking $100K Into Rental Properties? Consider This Passive Income Option Instead. was originally published by The Motley Fool
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