How to Earn Passive Income By Investing in REITs

Real estate investment trusts (REITs) are a popular way for investors to generate passive income. These investment vehicles allow individuals to invest in large-scale, income-producing real estate without the need to purchase or manage properties directly. By pooling resources with other investors, REIT shareholders can benefit from professional management, regular dividends and diversification. Understanding how to find and invest in REITs can help you tap into the potential of the real estate market while enjoying the benefits of a hands-off investment approach.

Want to learn more about how REITs could fit into your investment portfolio? Consider reaching out to a financial advisor .

What Are REITs, and How Does REIT Passive Income Work?

Modeled after mutual funds, REITs pool capital from numerous investors, enabling them to invest in a diversified portfolio of real estate assets, without individual investors having to purchase real estate or manage it themselves.

REITs generate passive income primarily through leasing space and collecting rent on their properties. This rental income is the main source of revenue for REITs, and is then distributed to shareholders in the form of dividends. By law, REITs must pay out at least 90% of their taxable income to shareholders. That means a significant portion of earnings is returned to investors as passive income. In addition to rental income, some REITs may also earn income from selling their properties. When a property is sold at a profit, those gains are also distributed to shareholders.

Types of REITs

Understanding the different types of REITs available can help you choose the right fit for your investment goals and risk tolerance. The three primary types of REITs are equity REITs, mortgage REITs, and hybrid REITs:

• Equity REITs own and manage income-generating real estate, such as office buildings, shopping centers and residential properties. Their primary source of income is rental revenue from the properties they lease. Equity REITs often offer the potential for capital appreciation as property values increase over time.
• Mortgage REITs (mREITs) invest in real estate mortgages and mortgage-backed securities rather than owning physical properties. They earn income from the interest on the mortgages they hold. Mortgage REITs can be more sensitive to interest rate fluctuations, offering potentially higher returns but also carrying higher risk.
• Hybrid REITs combine the investment strategies of both equity REITs and mortgage REITs. They generate income from property rentals and mortgage interest. This type of REIT offers a balanced approach, providing investors with both income stability and potential growth.

Benefits of Investing in REITs

There are a lot of benefits to investing in REIT passive income that make REITs an attractive option for those looking to generate income and diversify their portfolios:

• Steady income : REITs are required to distribute at least 90% of their taxable income as dividends, providing investors with a reliable stream of income.
• Attractive yields : The dividend yields from REITs can often be higher than those from other dividend-paying stocks and fixed-income investments.
• Reduced risk : Investing in REITs adds diversification to a portfolio, reducing overall risk by spreading investments across different assets.
• Real estate exposure : REITs offer exposure to the real estate market without the need for direct property ownership, allowing for a more varied investment mix.
• Easy trading : Since most REITs are publicly traded on major stock exchanges, they offer high liquidity, making it easy for investors to buy and sell shares. This liquidity provides flexibility, allowing investors to quickly adjust their holdings in response to market conditions.
• Expert oversight : REITs are managed by professionals with expertise in real estate , ensuring that properties are efficiently operated and maintained. This means investors get to benefit from professional property management without the responsibilities of being a landlord.
• Value growth : Equity REITs, in particular, offer the potential for capital appreciation as property values increase over time.

How to Invest in REIT Passive Income

Investing in REITs is a straightforward process, but there are several different ways to invest that you can choose from, depending on your situation:

Direct Purchase

• Publicly Traded REITs : You can buy shares of publicly traded REITs through any brokerage account, just like you would purchase stocks. These REITs are listed on major stock exchanges and offer the convenience of high liquidity and easy trading.
• Non-Traded REITs : These REITs are not listed on stock exchanges and can be purchased through brokers or directly from the REIT company. While they may offer higher yields, they also come with less liquidity and higher fees.

REIT Mutual Funds and ETFs

• Mutual Funds : REIT mutual funds pool money from many investors to buy shares in multiple REITs, providing diversification within the real estate sector. These funds are managed by professionals and can be purchased through mutual fund companies or brokerage platforms.
• ETFs : REIT exchange-traded funds (ETFs) are similar to mutual funds, but trade like stocks on an exchange. Benefits include diversification, professional management, and the ability to buy and sell shares throughout the trading day. Examples include the Vanguard Real Estate ETF (VNQ) and the iShares U.S. Real Estate ETF (IYR).

Retirement Accounts

• Tax-Advantaged Accounts : REITs can also be included in retirement accounts like IRAs and 401(k)s . Investing in REITs through these accounts allows you to benefit from tax advantages, such as tax-deferred growth or tax-free withdrawals, depending on the account type.

Bottom Line

Investing in a REIT can help you earn passive income from real estate without directly owning property. Benefits can include high dividends and portfolio diversification. From publicly traded shares to mutual funds and ETFs, investors have multiple options to gain exposure to the real estate market and potentially earn high dividends while diversifying their portfolios.

Tips for Generating Passive Income

• A financial advisor can help you decide what type of REIT may be best for your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• REITs can be a nice way to diversify your assets, but if you like, you can invest in real estate properties themselves.

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