Real estate is a cornerstone of wealth creation, and as the 19th century British philosopher and economist John Stuart Mill once said, “Landlords get rich in their sleep.”
Landlords don’t just collect rental income; You also benefit from the increase in the value of the property.
While it’s nice to earn monthly rental income from an investment property, being a landlord also comes with its share of problems.
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For example, you must carefully vet potential tenants, prepare rental agreements, and ensure rent is paid on time. It’s never fun chasing rent payments and dealing with delinquent tenants.
Landlords are responsible for the maintenance and upkeep of their properties, which may require frequent repairs and upgrades. They must also obtain adequate insurance coverage for their properties and pay property taxes, which may require ongoing attention.
All of this can make supposedly passive income a lot less passive—and that’s assuming you can even afford a large down payment, get a mortgage, and buy a home. According to Freddie Mac, the average interest rate for 30-year fixed-rate mortgages in the U.S. is currently 7.12%.
The good news? You don’t have to become a landlord to take part in the promotion.
Earn monthly rental income without becoming a landlord
Real Estate Investment Trusts (REITs) are a way to own real estate without the hassle of property management. REITs can be thought of as giant landlords – they own income-producing properties and collect rent from tenants.
REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, making them attractive to investors looking to earn passive income.
Many REITs are publicly traded, making it easy to invest in them. You can buy shares of a REIT just as you would buy shares of a company.
And while most dividend-paying companies follow a quarterly distribution schedule, some REITs pay shareholders monthly.
For example, Realty Income Corp. (NYSE:O) a REIT that bills itself as “The Monthly Dividend Company.” Over its 54-year operating history, the company has declared 637 consecutive monthly dividends.
Better yet, Realty Income has increased its payout 121-fold since going public in 1994.
Today, the REIT pays monthly dividends of 25.55 cents per share, representing an annual yield of 5.6%.
If you want to make $1,000 every month from real estate income, you need to own 3,913.89 REIT shares. This is calculated by dividing the $1,000 by the monthly payout per share of $0.2555.
And since Realty Income is currently trading at $55.15 per share, 3,913.89 shares would represent a share value of about $215,851.
If you’re aiming for a smaller goal of $200 per month, you’ll need 782.78 shares ($200 / $0.2555) or $43,170 worth of Realty Income shares (782.78 x $55.15).
Like other stocks, REITs can be volatile. Despite its impressive dividend payout track record, Realty Income shares are down 13% in 2023.
Brad Heffern, an analyst at RBC Capital Markets, sees a recovery on the horizon. The analyst has an Outperform rating and a $67 price target on Realty Income, implying a potential upside of 21%.
This is an example of how real estate investors can earn passive income without becoming a landlord. But like any investment, REITs involve risks and dividends are not set in stone. Therefore, always do extensive research and due diligence before jumping in.
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