This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Passive income is an investor's dream. You get to sit back and get paid on a regular basis without having to go out and hustle.
Meanwhile, investing in real estate is a great way to set yourself up with passive income. But that doesn't necessarily mean going out and purchasing a property you rent out. You may want to go a different route -- one that requires a lot less work and involves a lot less risk.
Get paid without the legwork
You'll often hear income properties touted as a solid means of generating passive income. But while collecting rent is a great way to keep the cash flowing, it may also require a fair amount of work on your part. After all, you'll need to keep track of tenant payments, lease renewals, maintenance, and repairs. You'll also need to deal with property-related or tenant issues as they arise.
If you like the idea of collecting steady income but want it to truly be passive in nature, then REITs, or real estate investment trusts, are a better bet. REITs are companies that own and operate portfolios of properties. Within the realm of REITs, there are different sectors you can invest in. Industrial REITs, for example, are companies that own fulfilment centres and warehousing space. Residential REITs, on the other hand, own apartment complexes.
The upside of owning REITs is that these companies are required to pay out at least 90% of their taxable income as dividends. So as a shareholder, that's income you can benefit from.
Now you may be asking "Why REITs?" Can't I just go out and buy up regular old dividend stocks? And you certainly can. But because of the aforementioned rule of paying at least 90% of their income as dividends, REITs tend to pay higher dividends than your average company. Plus, if you're not currently invested in real estate but are interested in branching out, REITs are a good way to do that.
Lots of upside, less risk
There's no such thing as a risk-free investment, and so you could end up buying REIT shares that lose value over time, leaving you with losses in your portfolio. But the same thing could happen any time you buy shares of a stock. And if you're used to investing in stocks, there's no reason not to apply the same mindset to REITs.
Meanwhile, with an income property, you actually end up taking on a lot more financial risk. Any time something in that property breaks, it's on you to repair it. And if you end up with a tenant who refuses to pay, you could be out a lot of money between lost rent and having to deal with the eviction process.
REITs don't cause you to take on those same risks because you're not buying actual property -- you're simply investing in companies that bear the risk of owning property. And so if you like the idea of passive income and want to collect it without having to work too hard or take on undue risk, then REITs really are a solid bet.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
