Should you forget about buying a rental property and consider this easier passive income investment?

Owning a rental property can be a lot of work. I know this firsthand and have for very little it even started.

My wife and I are at the moment thinking about transforming our old house into a rental property. I spent countless hours just talking to potential property managers about the process. I learned that getting a tenant for a house will cost us a lot of money in addition to our investment in the property.

We initially purchased the property because we thought it might be an ideal future rental if we couldn’t sell it when we were ready to move (which ended up being the case). Even with all the costs involved, it seems we can get enough rental income to make it worth it if we find the right tenant.

Leaving aside this passive income, I can guarantee by the fact that owning a rental property requires much more work and money than investing in a real estate investment fund (REIT).

Sometimes it’s better to pass on liabilities income

The main attraction of buying a property to rent is to make passive income from real estate. Owning a high-quality property in an excellent location can be very profitable.

An ideal rental property will generate enough income to cover the mortgage and any other property expenses with room to spare, providing passive income to the owner. In addition to this income, homeowners will benefit from increased equity as they pay off the mortgage and the property appreciates in value.

However, rental properties require a high initial investment. Typically, you need to put down at least 20% to buy one and pay closing costs furthermore. There are also upfront rental costs, such as necessary repairs and marketing expenses to find a high-quality tenant.

Adding it all up, it can cost well over $100,000 to buy a rental property and place a tenant. This is beyond the reach of many first-time real estate investors.

Meanwhile, there is the time factor. Although the IRS defines rental income as passive income, it’s not exactly a passive investment, even if you hire a property manager.

Just finding a property manager is a lot of work, as you need to understand the fees each one charges and the services provided, which can differ significantly. While some take care of all the maintenance and repairs for you (which comes at a cost), others inform you of the problem so you can resolve it yourself.

Given the big initial investment of time and money, many people are better off forgetting about buying a rental property. It may not be worth the few hundred dollars of extra passive income you will receive every month if the tenant pays the rent on time andd there is no repailol I need it.

The story continues

Very easier and lower cost alternative

Considering that rental properties are not exactly passive investments, REITs are as passive as they come. You’ll need to do your due diligence before making any investments, but once you buy shares of a high-quality REIT, you can relax and watch passive dividend income flow into your account. There are many great REITs to buy.

Real estate income (NYSE:O) is one of the best. It has an increasingly diverse commercial real estate portfolio across the retail, industrial and gambling sectors (think supermarkets, warehouses and casinos).

It rents these properties back to high-quality tenants under long-term leases. net leases that raise the rent every year. These leases require tenants to cover all operating costs of a property, including building insurance, routine maintenance, and real estate taxes. This allows Realty Income to earn very stable rental income.

Pays around 75% of its cash flow in dividends every month and retains the remainder to invest in new income-generating properties. Realty Income has a remarkably consistent track record of paying dividends: 652 consecutive monthly payments throughout its history.

It has increased its payout 127 times since going public in 1994, including to 108 consecutive quarters. Given the stability of its portfolio and the strength of its balance sheet, investors should continue to bet on an ever-increasing dividend from this REIT.

You can buy shares for just over $60 nowadays. You would earn a yield of over 5% at the current share price. At this rate, every $1,000 invested in REIT shares would generate more than $50 in dividend income every year, or a little more than $4 every month. The more you invest, the more and more REIT dividend income you collect every month.

Consider what is best for your situation

Buying a property to rent it is not to all. It requires a high initial investment and can take quite of your time. It could no produce both income as you wait if there is a bad tenant or maintenance issues.

This is why many would-be real estate investors should forget about buying a rental property and consider investing in a REIT like Realty Income. He has a very low start-up cost and offers passive income, allowing anyone to start making money quickly.

Should you invest $1,000 in real estate income now?

Before buying Realty Income stock, consider the following:

THE Motley Fool Stock Advisor the team of analysts has just identified what they believe to be the 10 best stocks for investors to buy now… and Realty Income was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia I made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $826,069!*

Stock advisor provides investors with an easy-to-follow plan for success, including guidance on building a portfolio, regular analyst updates, and two new stock picks each month. THE Stock advisor service has more than quadrupled the return of the S&P 500 since 2002*.

See the 10 actions »

*Stock Advisor returns October 7, 2024

Matt DiLallo holds positions in Realty Income. The Motley Fool has positions and recommends Realty Income. The Motley Fool has a disclosure policy.

Should you forget about buying a rental property and consider this easier passive income investment? was originally published by The Motley Fool