I’ve been doing a bit of research on the habits of successful passive income investors, and I came across a bit of a surprise.
They all seem to name dividend stocks as a major part of their investment portfolios — though that’s not the surprising part. No, what I hadn’t expected was to find a large number of them recommending real estate.
Yes, real estate has been profitable for a number of people. But I had a very shaky venture into it. And it has a fair few drawbacks for individual investors.
Not really passive
One is that many of us won’t have the capital to go for, say, rental properties. It’s not the kind of thing we can get started with just a few hundred pounds, like we can with a Stocks and Shares ISA.
It’s not entirely passive either. Finding tenants, collecting rent consistently, and maintenance all take time and effort. And the latter can sometimes prove very costly if you’re unlucky.
But there’s a way we can get into real estate without facing those major hurdles. And that’s to consider buying real estate investment trusts (REITs). They’re investment companies that put their money into various kinds of properties, and they do all the management. All we have to do is buy shares in them, just as we do with shares in general.
Healthy property
I like Primary Health Properties (LSE: PHP), which invests in GP surgeries, pharmacies, dental clinics. Importantly, they’re mostly rented to the NHS on long-term leases.
Having the UK government as its main customer provides some stability and predictability. But it hasn’t made the trust immune to weak property values in recent times. Over the past five years, the PHP share price has fallen 35%.
Higher interest rates are a burden, especially with debt on the books. At the end of the first half this year, net debt reached £1,367m, up from £1,323m in December 2024. There doesn’t seem to be any liquidity problem, but it could keep the shares down for longer.
Big dividends
On the bright side, a lower share price means a bigger dividend yield. Right now, we’re looking at a forecast 7.3%. And analysts are forecasting rises between now and 2027. We could have long-term capital appreciation too — especially when interest rates fall.
Is Primary Health one to consider for long-term passive income? Even in the current tough real estate market, I think it has to be, especially while the share price is low.
There are plenty of other REITs to choose from, addressing different sectors of the property market.
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Millionaire style
Quite a few millionaire investors also invest for deferred income. That is, they aim for total returns — capital and dividends — and plan to convert it to income later.
So how do we emulate the millionaire approach to passive income? If we focus mainly on dividend shares, include a REIT or two in our portfolio, and look for long-term growth opportunities too — we could get pretty close. And we don’t have to be millionaires to start.
