Enjoying a steady stream of income without having to lift a finger is pretty much the dream, isn’t it? And if you’re ready to get into real estate, it’s more than possible to generate your fair share of passive income. It’s money you can use to grow your wealth for the future or access it during your retirement years when you need to supplement your Social Security benefits.

There are now different ways to invest in real estate to generate passive income. One option is to charge on income properties, outsource their management, and sit down and collect rents.

But owning physical real estate comes with risks. You have to maintain the actual properties, which could become more and more expensive over time. In addition, your income properties may remain vacant for some time. The result? No income for you. Therefore, a possibly less risky way to generate passive income through real estate investing is to hold a diverse mix of real estate investment trusts (REITs) in your portfolio.

The advantage of REITs

REITs are companies that own and operate different types of properties. REITs generally focus on one specific type of property (although there are also diversified REITs, which own different types of properties).

Industrial REITs, for example, are those that operate warehousing and distribution centers. Healthcare REITs, on the other hand, operate facilities such as hospitals and urgent care centers.

The advantage of REITs is that they are required to pay out at least 90% of their taxable income to shareholders as dividends each year. And often they will end up paying more. These dividends can then be cashed if the need exists. Or they can be reinvested to help you grow your wealth.

Of course, REITs aren’t your only option for generating dividend income. You can also turn to regular stocks paying dividends. But since REIT dividends tend to be higher than average, they are worth looking into. Also, if you don’t have real estate stocks in your portfolio, REITs could lend themselves to good diversification.

What about the risks?

REITs are not a risk-free prospect. Just as common stocks can lose value, REIT shares can also lose value if market conditions deteriorate. But if you choose your REITs carefully, you can limit your risk to some extent.

Right now, for example, office REITs are a somewhat risky prospect due to the possibility that remote work will become permanent in many sectors. So that’s an area you might not want to venture into just yet. On the other hand, residential REITs, which own properties like apartment complexes, are booming as rental demand soars. These REITs may therefore be a better place to put your money.

All in all, REITs are a great option for generating passive income due to their generous dividends. And so, it pays to make room for them in your portfolio, especially if you’re looking to diversify into real estate but don’t want to own actual properties.