Retire early: make a growing passive income with REITs

REITs could offer inflation-beating income returns over the long run.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The potential to generate a growing passive income through investing in real estate investment trusts (REITs) remains high.

Certainly, there are fears surrounding the outlook for the global economy, with trade tensions between the US and China being high.

However, with the prospect of a loose monetary policy being pursued by many of the world’s major central banks, the industry may experience continued growth over the medium term.

Favourable operating conditions

Since the financial crisis, global property prices have benefitted significantly from an accommodative monetary policy that has been pursued by a number of central banks. Policies such as lower interest rates and the Federal Reserve’s asset repurchase program have improved confidence among investors, which has led to rising asset prices.

Looking ahead, there could be a continuation of this trend in the medium term. Weak economic data in the US means that a cut in interest rates is becoming increasingly likely. Certainly, the previously expected rise in interest rates after the upward movements in previous months is now unlikely. This could mean that the global economy, and thereby asset prices, gains a boost over the medium term.

Cyclicality

Although property prices may have faced an uncertain period of late, their long-term track record has generally been favourable. Therefore, investing in REITs is likely to be a beneficial strategy to investors who are seeking to generate a passive income over the long run.

Even if property prices come under pressure in the short run, investors in REITs could benefit. It may be possible to buy attractive assets at below their intrinsic value; thereby creating greater scope for profitability through the cycle. Since REITs generally have impressive income returns that may prove to be sustainable even during challenging operating conditions, investors in them may have the cash flow required to increase their exposure the sector during periods of uncertainty. This could help them to maximise their long-term returns.

Debt

Although the property industry may have a solid track record of growth and could benefit from a dovish global interest rate environment, ensuring that REITs have modest leverage could be a sound idea.

This could help investors to avoid potential losses. It may also ensure they invest in companies that could be better-placed to capitalise on possible opportunities which may be ahead during more challenging parts of the property cycle.

Focused growth

With the world economy continuing to evolve towards a digital future, investors may wish to focus on REITs that have exposure to faster-growing segments of the economy.

For example, consumers are increasingly comfortable buying goods online. This may mean that demand for warehouses increases and retail units are gradually converted to office or residential space. As a result, REITs that own vast swathes of retail units may be unable to deliver the level of returns that companies with portfolios that are focused on warehousing can offer.

Overall, though, the sector appears to have a favourable long-term outlook. Through diversifying and adopting a buy-and-hold strategy, REITs look set to offer a growing passive income for investors.

More on Investing Articles

This way, That way, The other way - pointing in different directions
Investing Articles

As the FTSE indexes sink, these unique dividend shares are making investors money

These two dividend shares are in positive territory for the month and outperforming the major FTSE indexes by a significant…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Down 15% in days, are Rolls-Royce shares suddenly a bargain again?

Rolls-Royce shares have been heading south over the past couple of weeks. This writer thinks that makes sense -- but…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

What would a 40-year-old need to put into an empty SIPP to target monthly passive income of £1,000?

From a standing start at 40, how might someone target a four-figure monthly income stream from their SIPP? Christopher Ruane…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

As the ISA deadline approaches, UK investors have the opportunity to buy cheap shares

In recent weeks, equity markets have fallen significantly due to the conflict in the Middle East. As a result, many…

Read more »

Array of piggy banks in saturated colours on high colour contrast background
Investing Articles

£5k left in a Stocks and Shares ISA? 2 top ETFs to consider buying in April

Ben McPoland highlights a pair of very different ETFs that he thinks could help generate long-term wealth inside an ISA…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

Could a £20,000 ISA end up generating £20,000 of passive income each year?

Could a Stocks and Shares ISA ultimately cover its own cost each year with the passive income it produces? Christopher…

Read more »

A young black man makes the symbol of a peace sign with two fingers
Investing Articles

2 top stocks to consider buying after this week’s FTSE carnage

Investors looking for beaten-up stocks to buy for the long term have a lot of great options after the recent…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

A stock market crash could be a gift for long-term investors

A stock market crash could present some outstanding buying opportunities. But the key to taking advantage is knowing what to…

Read more »