EA steady stream of income without having to lift a finger is pretty much the dream, right? And when you’re ready to get into real estate, generating your fair share of passive income is more than possible. That’s money you can use to grow wealth for the future or access during your retirement years when you need to top up your Social Security benefits.
Now, there are several ways real estate investing can make it possible to generate passive income. One way is to load up investment properties, outsource their management and sit back and collect rent payments.
But owning physical real estate comes with risks. You must obtain actual real estate, which can increase in price over time. There is also the possibility that your investment property will be empty for some time. The result? No income for you. So perhaps a less risky way to generate passive income through real estate investing is to hold a diverse mix of real estate investment trusts (REITs) in your portfolio.
The advantages of REITs
REITs are companies that own and operate various types of real estate. REITs tend to focus on a specific type of property (although there are diversified REITs that own different types of property).
Industrial REITs include those that operate warehouses and fulfillment centers. Healthcare REITs, on the other hand, operate facilities like hospitals and emergency centers.
The great thing about REITs is that they must pay at least 90% of their taxable income to shareholders in dividends each year. And often they end up paying more. These dividends can then be paid out when required. Or they can be reinvested to help you build additional wealth.
Of course, REITs aren’t your only way to generate dividend income. You could also turn to regular dividend stocks. But since REIT dividends tend to be above average, they’re worth checking out. Even if you don’t have real estate stocks in your portfolio, REITs could provide good diversification.
What about the risks?
REITs are not a risk-free prospect. Just as stocks of regular stocks can fall in value, REIT stocks can also fall in value when market conditions deteriorate. But if you choose your REITs carefully, you can limit your risk to some extent.
Right now, office REITs, for example, are a bit of a risky prospect given the possibility of remote work becoming permanent in many industries. So that’s an area you might not want to get involved in right now. On the other hand, residential REITs, which own properties such as apartment complexes, are booming as rental demand increases. So these REITs might be a better place to put your money.
All in all, REITs are a great option for generating passive income because of their generous dividends. As such, it’s worth making room for them in your portfolio, especially if you plan to branch out into real estate but don’t plan to own actual real estate.
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