Investing money in real estate investment trusts (REITs) could be a sound means of obtaining a generous passive income. In some cases, their prices have fallen in recent months so that they now offer high yields relative to other income-producing assets.
Furthermore, investing in a REIT provides significant diversification and risk reduction. The wide range of properties they hold means that an investor is less reliant on a small number of assets for their income, which is often not the case with direct property investment.
In the long run, REITs could offer worthwhile capital returns as investor confidence improves and the economic outlook strengthens.
Making a passive income
The yields on offer from REITs are relatively appealing at a time when it is increasingly difficult to make a passive income elsewhere. The uncertain economic outlook has led many companies to reduce or even cancel their dividend payouts. Many others could follow in the coming months.
Meanwhile, low interest rates mean that other income-producing assets such as cash and bonds offer returns that are lower than inflation in some cases. Therefore, holding them could lead to a loss of spending power in the coming years that negatively impacts an investor’s financial prospects.
As such, buying a range of REITs today could be a simple means of obtaining a worthwhile passive income. Many of them have a long track record of dividend growth that could prove to be relatively resilient in the coming years.
Some investors may have previously bought property directly to make a passive income. While this may have been a successful strategy, it can carry a significant amount of risk. The high cost of property means that building a diverse portfolio is a difficult aim for most investors. Therefore, they become reliant on a small number of assets for their income.
By contrast, a REIT has a vast amount of assets. Often, they operate in different segments, such as leisure, retail and office properties. And, many REITs have exposure to different regions that further reduces their overall risk. This high level of diversification could mean that an investor enjoys a more robust income return that is less volatile over the long run.
Capital growth possibilities
Since many REITs offer generous passive incomes while interest rates are low, they could become more popular in future. This could be the spark that drives their share prices higher and lead to capital growth for investors.
With the economic outlook being challenging at the present time, many REITs may also trade on low valuations. This may further improve their return prospects, and allow investors to benefit from their growth opportunities as well as their generous income return. As such, I’m thinking of buying REITs now and holding them for the long run.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.