Commercial real estate is vital to everyday life. Most of us spend some time each week going to the grocery store, dining in a restaurant, or filling our cars with gas. Those routine activities require physical buildings to provide us with those goods and services. And these buildings are a potential goldmine of passive income hiding in plain sight.
There's an estimated $14 trillion of commercial real estate around the U.S. and Europe suitable for net leases, a common arrangement where a tenant pays rent and other agreed-upon expenses. Those leases provide their landlords with very stable passive income.
What might surprise you is that you don't need to become a landlord to access this passive income. Several real estate investment trusts (REITs) focus on net lease real estate. They enable anyone to sit back and collect a steady stream of passive dividend income for much less work and money than required to buy and manage one of these buildings yourself.
The net lease REIT king
Realty Income(NYSE: O) is the largest REIT focused on net lease real estate. The company owns around 15,450 income-producing properties across the U.S. and Europe. Its holdings include grocery stores (10.2% of its rent), restaurants (4.9% quick service and 4.2% casual dining), convenience stores (9.4%), and many other property types. It leases these buildings to high-quality retailers like Dollar General, Walgreens, and 7-Eleven. While it focuses on retail properties (79.4% of its rent), Realty Income also invests in industrial real estate (14.9%), gaming properties (3.3%), and other property types like data centers (2.8%).
The REIT pays out less than 75% of its stable rental income to investors in dividends each month. At recent prices, it offers a dividend yield above 5%. At that rate, every $1,000 you invest to buy shares of Realty Income would generate over $50 of annual passive income. You don't even need that much money to begin -- shares of Realty Income cost a little more than $60 apiece these days, and you only need to buy one share at most online brokerages (and less than that if the broker offers fractional shares).
Realty Income uses the income it retains (and other capital sources) to invest in more income-producing real estate. That strategy has enabled the REIT to steadily increase its dividend. It has raised its payout for 107 straight quarters and 126 times overall since coming public in 1994. With a $14 trillion total addressable market for net lease real estate, this REIT has plenty of runway to continue growing.
A well-diversified net lease REIT
W. P. Carey(NYSE: WPC) is one of the largest net lease REITs. It has a well-diversified portfolio of high-quality, operationally critical properties. It currently has almost 1,300 net lease properties across North America and Europe (35% industrial, 29% warehouse, 21% retail, and 15% other properties). Its other properties also include 89 self-storage properties, four hotels, and two student housing properties that it operates.
The REIT targets paying investors 70% to 75% of its stable rental income via dividends each quarter. W. P. Carey currently offers a dividend yield approaching 6%. Investors can buy shares for less than $60 apiece at recent prices.
W. P. Carey has reshuffled its net lease portfolio over the past year. It has exited most of its office properties and sold back a portfolio of self-storage properties to the operator. Those sales brought in cash to reinvest in other net lease properties. For example, W. P. Carey recently spent $258 million to buy a portfolio of 19 industrial facilities, two newly built distribution centers, and two fitness facilities. These new investments will grow its income, which will allow the REIT to increase its dividend.
Properties you use every day can be a source of passive income
We routinely go into grocery stores, restaurants, convenience stores, or the gym. We're probably not even thinking about their income potential. However, most of those businesses lease their space from a real estate investor like a REIT, which supplies passive income to their landlords. You can access those income streams by investing in a REIT focused on these properties, like Realty Income and W. P. Carey. Investing a little money each month into a net lease REIT can help you build a real estate empire that produces steadily rising passive income.
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Matt DiLallo has positions in Realty Income and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
