How to Easily Collect Passive Income From Real Estate Without Buying a Rental Property

Key Points

• Investing in REITs is an easy way to generate passive income from real estate.

• Invitation Homes owns over 110,000 single-family rental homes that generate dividend income for investors.

• Realty Income owns over 15,600 commercial properties that produce very stable rental income to support its rising monthly dividend.

• 10 stocks we like better than Realty Income ›

Many people buy one or more rental properties to generate passive income. That can be a very good income-producing strategy. However, it does have some drawbacks, including a high up-front investment and the need to actively manage the property.

An even easier way to make passive income from real estate is to buy shares of a real estate investment trust (REIT). These entities own large portfolios of professionally managed income-generating rental properties. They distribute a portion of the cash flow to investors via dividend payments. Those features make REITs very passive investments.

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Here are a couple of top REITs to consider buying for super-easy passive income from real estate.

Image source: Getty Images.

Cashing in on single-family rental properties without being a landlord

Most beginning real estate investors will buy a single-family home that they'll turn into a rental property. While this strategy can yield some rental income, it has many potential pitfalls. For example, tenant troubles or repair issues can quickly turn your property from a moneymaker to a money pit.

Invitation Homes (NYSE: INVH) makes it easy to invest in single-family rental properties without all the possible pitfalls. The REIT owns or manages over 110,000 homes across 16 top housing markets. That broad diversification helps reduce risk, enabling the landlord to generate steadier income to support dividend payments.

The company pays its investors $0.29 per share in dividends each quarter ($1.16 annually). With its share price recently in the low $30s, it has a dividend yield of around 3.5%. Put another way, every $1,000 invested in the REIT would produce about $35 of passive dividend income each year.

Invitation Homes typically pays out a little more than 70% of its cash flow in dividends. It retains the rest to invest in new rental properties. The REIT will buy houses on the open market, purchase rental properties from other investors, and acquire homes directly from homebuilders. For example, the company recently partnered with several homebuilders to buy over 300 future homes for more than $100 million. It also provided a $32.7 million loan to a homebuilder developing a 156-home community that it can purchase upon completion.

The landlord's investments to expand its portfolio grow its rental income. That enables the REIT to increase its dividend. It has raised its payment every year since its initial public offering in 2017, including by 3.7% last December.

Becoming a real estate mogul without lifting a finger

As real estate investors build their portfolios, they often diversify into commercial real estate. That strategy requires a significant amount of capital, as these properties are expensive to purchase. However, they can generate very stable rental income backed by long-term leases.

Realty Income (NYSE: O) makes it easy to invest in commercial real estate. The REIT owns a diversified portfolio of 15,600 properties across the U.S. and Europe. It owns single-tenant retail, industrial, gaming, and other properties net leased to many of the world's leading companies (its top tenants include 7-Eleven, FedEx, and Walmart). Net leases are very landlord-friendly because they require tenants to pay all property operating costs, including building insurance, real estate taxes, and routine maintenance. As a result, the REIT generates very stable cash flow.

The company pays its investors each month (currently $0.269 per share or $3.228 annually). With its stock price in the mid $50s, Realty Income has a dividend yield of more than 5.5%. At that rate, you'd collect around $4.60 in dividend income each month for every $1,000 invested in the REIT.

Realty Income also routinely raises its monthly dividend payment. It has increased the amount 131 times since its public market listing in 1994, including the last 111 quarters in a row. It has grown its payout at a 4.2% compound annual rate over the past 30 years.

The REIT should be able to continue steadily increasing its payment. It pays out about 75% of its stable cash flow in dividends, enabling it to retain the other 25% to invest in income-generating properties. Realty Income also has a strong balance sheet, giving it additional financial flexibility to invest in properties. It makes sale-leaseback transactions with property owner-operators, buys portfolios from other investors, and invests in build-to-suit development projects.

Easy ways to generate passive income backed by real estate

Investing in a rental property isn't for everyone. However, anyone can buy shares of a REIT to collect passive dividend income. Invitation Homes and Realty Income are great options because they pay steadily rising dividends supported by high-quality portfolios and financial profiles.

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Matt DiLallo has positions in FedEx, Invitation Homes, and Realty Income. The Motley Fool has positions in and recommends FedEx, Invitation Homes, Realty Income, and Walmart. The Motley Fool has a disclosure policy.