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The IRS qualifies income earned from rental properties as passive. However, anyone who has ever owned a rental property knows that being a landlord is anything but passive. It requires active management to find and manage tenants, pay the bills, and keep up with repairs.
The good news is that there are alternatives for those who love the idea of generating passive income from real estate but don’t want to work so hard for that money. One easy way to get on the passive income gravy train is to invest in real estate investment trusts (REITs). Here are two top REITs that provide some of the benefits of owning rental properties without the effort.
Most rental property owners start by purchasing a single-family home that they rent out. While managing one house isn’t a lot of work, owning one rental property likely won’t produce the passive income a person will need to retire. For that, you’d need a whole portfolio of properties, which would be a lot more work to manage.
An effortless way to invest in a portfolio of single-family rental properties is to purchase shares of Invitation Homes (INVH 0.74%). The residential REIT owns more than 80,000 rental properties across the U.S., focused primarily on the country’s fastest-growing housing markets.
Invitation Homes offers its shareholders a steady income stream. The REIT currently makes a dividend payment of $0.22 per share each quarter, giving it a 2.4% dividend yield at the current stock price. That means every $1,000 invested in the REIT would produce $24 of passive income annually. That’s money investors can bank on each year. In contrast, landlords’ rental incomes can fluctuate from month to month depending on expenses, and could be negative if they have a sizable unplanned cost or a property vacancy.
The REIT has steadily increased its payout as it has grown its revenues through rising rental rates and portfolio expansion. Lease rates across its portfolio were up by 11.8% year over year in the second quarter. Meanwhile, it purchased another 955 homes for $426 million in the quarter.
Invitation Homes expects its dual growth drivers to remain firmly in place, driven by strong housing demand and low inventory levels. The company has secured a steady stream of new rental homes through several partnerships, including one with national homebuilder PulteGroup that will supply it with 7,500 new homes over the next five years. These growth drivers should enable Invitation Homes to continue growing its dividend, providing even more passive income to investors in the coming years.
Another class of traditional rental property investment is multifamily housing, like four-plexes or small apartment buildings. To own multifamily properties often requires a lot of work managing tenants and keeping the buildings in good repair.
An easier solution is to invest in a high-quality apartment REIT such as Camden Property Trust (CPT 0.46%). The company owns 171 properties containing 58,425 apartments across 15 fast-growing housing markets.
Camden currently pays a fixed quarterly dividend of $0.94 per share. At recent stock prices, that works out to a 2.8% dividend yield.
The REIT has an excellent track record of payout hikes powered by rent growth and its steadily expanding apartment portfolio. Its rents rose 15.3% on average in the second quarter thanks to the tight housing market. That’s allowing Camden to invest in new apartment developments. It’s currently spending $603 million to build 1,842 apartments, and has several more developments in the pipeline. The REIT will also acquire stabilized apartments: It recently spent $1.1 billion to purchase full control over 7,247 apartments. That combination of rising rental rents and a growing portfolio should enable Camden to continue increasing its dividend payouts.
While rental properties offer the promise of passive income, you’ll actually need to work to earn that money. On the other hand, REITs are truly passive investments. Even better, many deliver steady income instead of the lumpy cash flow produced by most rental properties. That makes them an effortless way to collect passive income from real estate.
Matthew DiLallo has positions in Camden Property Trust and Invitation Homes Inc. The Motley Fool has positions in and recommends Camden Property Trust and Invitation Homes Inc. The Motley Fool has a disclosure policy.
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