Thinking About Buying a Rental Property in 2026? Consider These Passive Income Investments Instead.

More than half of Americans plan to set a financial resolution for the new year, according to Motley Fool Money's Financial New Year's Resolution Report. Boosting income, investing more, and starting a small business or side hustle are among the goals many of us have set for the new year. One way to potentially achieve these goals is to buy a rental property for passive income.

While investing in a rental property is one way to make passive income from real estate, this strategy has its drawbacks. It can have a high start-up cost, often requires active management, and the wrong tenant or property can turn your rental from a money maker to a money pit.

That's why you might want to consider investing in a real estate investment trust (REIT) for passive income instead of buying a rental property. They require a much lower upfront investment, are truly passive, and enable you to generate predictable dividend income. Here are two top REITs to consider buying for passive income in 2026.

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The rental property replacement

Invitation Homes (NYSE: INVH) focuses on investing in or managing single-family rental properties. It currently owns over 86,000 homes, has joint venture interests in nearly 8,000 additional homes, and manages more than 16,000 properties for third-party investors. The company owns rental properties across more than a dozen metro areas, with a focus on housing markets that benefit from above-average population and employment growth rates. Invitation Homes offers investors significant diversification, which helps reduce risk. Meanwhile, its scale and property management capabilities help reduce costs.

The REIT pays its investors a quarterly dividend of $0.30 per share ($1.20 annualized). Invitation Homes increased its payment by 3.4% in December and has now raised its dividend every year since its initial public offering in 2017. Shares of Invitation Homes cost approximately $30 each, offering a low investment rate to own a stake in a large portfolio of rental properties. At that share price, the REIT has a dividend yield of 4.3%. To put that income yield into perspective, every $10,000 you invest in the REIT would generate $430 of annual dividend income.

Invitation Homes has multiple growth drivers. Its existing portfolio produces steadily rising rental income as legacy leases expire and it signs new ones at higher rates. The REIT also routinely buys new rental properties. It will acquire them from third-party investors, purchase vacant houses on the open market, and buy newly built homes directly from leading homebuilders. It also grows by expanding its third-party management platform and by providing builders with loans to fund new developments. These growth drivers should enable the REIT to continue increasing its dividend.

The real estate passive income powerhouse

Realty Income (NYSE: O) invests in a diversified portfolio of commercial real estate. It primarily owns retail, industrial, gaming, and other properties secured by long-term net leases with many of the world's leading companies, including FedEx, Home Depot, and Walmart. Net leases provide very stable rental income because tenants cover all property operating costs, including routine maintenance, real estate taxes, and building insurance. Realty Income owns over 15,500 properties across the U.S. and Europe, including grocery stores, warehouses, casinos, and data centers.

The REIT pays a monthly dividend of $0.27 per share ($3.24 annualized). Realty Income routinely raises its dividend payment. It has increased its dividend 133 times since its public market listing in 1994, including for the past 113 quarters in a row, growing the dividend at a 4.2% compound annual rate during that period. Realty Income's payout currently yields 5.7% at its recent price below $60 a share.

Realty Income benefits from contractual rental rate increases embedded in its long-term leases. Additionally, the REIT routinely invests in new income-producing real estate. It will acquire properties in sale-leaseback transactions, buy them from other investors, invest in build-to-suit development projects, and make credit investments (real estate-backed loans and preferred equity investments). These growth drivers should enable Realty Income to continue increasing its monthly dividend.

Ideal alternatives to buying a rental property

Investing in a rental property can be a good way to increase your income. However, it's not exactly a passive investment and might not provide you with predictable cash flow. Because of this, you might want to consider investing in a high-quality REIT, such as Invitation Homes or Realty Income, instead. They have lower up-front costs and provide much more passive and predictable income.

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