Investing in REITs is a low-cost way to start generating passive income from real estate.
Rental properties can provide their owners with a nice supplemental income source. However, as the old saying goes, it takes money to make money. That's certainly true of rental properties. The initial investment can be over $50,000 when factoring in the down payment, closing costs, and any renovations or repairs needed to make the property ready to rent. That's not the kind of cash most beginning investors have lying around.
However, those starting on their investing journey do have alternative options. Investing in real estate investment trusts (REITs) can be a great way to collectpassive income from real estate. Two excellent options for beginners to consider areRealty Income(O 0.11%) andStag Industrial (STAG 0.20%).
The name says it all
Realty Income is a great REIT to own for dividend income. It invests in properties that produce durable rental income, enabling the REIT to pay a dependablemonthly dividend. That's exactly what it has delivered over the years. The REIT has paid 637 consecutive monthly dividends over its 54-year history. That monthly payout is ideal for passive income seekers.
Budding real estate investors don't need much money to buy shares of Realty Income. They can buy as little as one share (currently costing less than $60). That investment will start producing income right away. The REIT's monthlydividend yields5.2% (which is several times higher than theS&P 500's 1.5% dividend yield). To put that into perspective, every $1,000 invested into buying Realty Income's stock would produce about $52 of annual passive income. That compares to only about $15 for a $1,000 investment in an S&P 500 index fund.
Realty Income supports its attractive dividend with a high-quality real estate portfolio. It currently owns a diversified portfolio of over 13,000 properties (primarily retail, industrial, experiential, and agricultural) across North America and Europe, leased to over 1,300 tenants under long-term net lease (NNN) agreements. Those leases make the tenants responsible for covering maintenance, building insurance, and real estate taxes, enabling Realty Income to produce very stable rental income.
The REIT pays out a relatively conservative percentage of its steady rental income in dividends (76.5% of its adjustedfunds from operationsin the second quarter). That gives it a nice cushion while allowing it to retain some cash to fund new income-producing real estate investments. The company's growing portfolio increases its rental income, allowing the REIT to steadily raise its dividend.
Realty Income has increased its dividend 121 times since its public market listing in 1994. That upward trend seems likely to continue, making the REIT a great option for those seeking a steadily rising passive income stream.
Focused on in-demand real estate
Stag Industrial is a low-priced REIT (shares are currently around $35 apiece). It also pays a monthly dividend that currently yields 4.1%.
Theindustrial REITowns over 550 warehouses and light manufacturing facilities leased to credit-worthy tenants under long-term agreements.Demand for industrial real estate is strong these days, driven by steadily increasing e-commerce adoption and changing supply chain management practices. That's driving up market rents. Stag is steadily capturing higher market rents as legacy leases expire and it signs new leases. The REIT has already addressed 94.2% of its expected 2023 lease expirations. It has captured a more than 30% increase in rents compared to the prior rates on the same space.
Stag Industrial's other growth driver is acquisitions. The REIT has historically acquired an average of $750 million of properties annually. While it expects lower acquisition volume in 2023 (between $300 million and $700 million) because of the current market environment, it has over $3.1 billion of acquisition opportunities in its pipeline. As market conditions normalize, acquisition volume should increase.
The company's dual growth drivers should increase its rental income, enabling Stag Industrial to continue growing its dividend. It has steadily raised its payout since its public market listing in 2011.
You don't need a lot of money to start earning passive income from real estate
Not everyone can afford the high initial investment needed to buy an income-producing rental property. The good news is that you don't need a lot of money to invest in real estate because REITs make it accessible for almost everyone. Realty Income and Stag Industrial are great options for beginners because they offer high-yielding dividends that should continue rising steadily.
Matthew DiLallo has positions in Realty Income and Stag Industrial. The Motley Fool has positions in and recommends Stag Industrial. The Motley Fool recommends Realty Income. The Motley Fool has a disclosure policy.
