For many investors, earning a steady stream of passive income is really the dream. And why wouldn’t it be? The idea of sitting back and collecting income is something that’s apt to appeal to anyone.
But within the realm of real estate investing, there are different approaches you can take to building your own passive income empire. You could load up on rental properties, for example, and enjoy monthly income via rent payments. Or you could fill your portfolio with REITs (real estate investment trusts), sit back, and collect ongoing dividend payments that tend to be more generous than those paid out by your typical stock.
But it’s important to choose the right approach to building passive income through real estate. And to that end, it pays to follow these three steps.
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1. Assess your tolerance for risk
Both REITs and rental properties come with their share of risk. But if you’re the risk-averse type, you may find that REITs are a better fit.
When you buy REITs, there’s always the risk that your shares will lose value. But that’s a very different risk than buying a rental property and having to cover the cost of a $5,000 roof or $10,000 HVAC repair out of the blue.
2. Figure out how much work you’re willing to put in
While both REITs and rental properties can be considered passive income streams, you’re apt to do a lot less work to invest in the former. Sure, with REITs, you need to research companies initially and keep tabs on their performance. But that’s not the same thing as having to oversee tenant issues, arrange for property maintenance, and deal with repairs as they arise.
That said, if you’re willing to enlist the help of a property manager, you may find that owning a rental property works for you as a passive income stream. You’ll pay a fee for that service, but if your rental does well, it may be worth it.
3. Choose the vehicle that best lends itself to your goals
Maybe you’re hoping for an early retirement, or you want to generate enough income to put your children through college. Both REITs and income properties have the potential to make that happen, but you’ll need to think about which option is more likely to get the job done.
And to be clear, in this situation, it’s easy to make the case that either one is a solid contender. So if you’re torn, you may want to favor the option that better aligns with your tolerance for risk and the effort you’re willing and able to put in.
Get ready to generate lots of wealth
If your goal is to enjoy a steady stream of passive income, follow these steps to land on the right real estate investment vehicle to make that happen. But keep in mind that you definitely don’t have to choose between REITs and income properties. You may find that a combination of both is the ideal choice for you, and that’s an absolutely solid path to take.