How I'd invest in REIT stocks to earn a passive income

Investing money in a diverse range of REIT stocks while they trade at low prices could be a means of generating a worthwhile passive income.

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

Real estate invest trust (REIT) stocks experienced a mixed 2020. Many of them delivered falls in their valuations as a result of changing demand among consumers and businesses. For example, offices and retail units are in lower demand as working from home becomes more popular.

However, the wider property sector could experience an improving performance as the economic recovery takes hold. With many trusts trading at low prices, now could be the right time to buy them to make a generous passive income.

The prospects for REIT stocks

As with many companies, the prospects for REIT stocks continue to be relatively uncertain in the short run. The coronavirus pandemic is putting pressure on retailers and a variety of other businesses. This may mean that some landlords face rent collection challenges that put their financial outlook under a degree of pressure.

However, on a long-term view, investing in the property sector could be a shrewd move. The industry could benefit from a likely economic recovery over the coming years that provides improving confidence among businesses and consumers. The end result could be stronger financial performances from property companies.

Many REIT stocks may also have the financial strength to adjust their asset portfolios to adapt to changing demands within the commercial property sector. For example, they may be able to invest in flexible office space or warehousing, or shift their focus towards new market segments that provide stronger growth prospects over the coming years.

Investing in listed property stocks today

When investing in REIT stocks, it is crucial to ensure there is sufficient diversity. Some companies are focused on one specific area, such as retail units. Therefore, it could be worth buying multiple stocks so that an investor has exposure to a broad range of assets in different market segments and locations. This may produce a more resilient passive income that is likely to grow at a faster pace over the long run.

Meanwhile, buying property stocks at a discount to their intrinsic values could be a shrewd move. Even though the sector has recovered to some extent from the 2020 stock market crash, it is still possible to purchase REIT stocks at low prices. In some cases, they may even trade at a wide discount to their net asset value. Cheaper stocks can provide greater scope for high returns in the long run.

Of course, in the short run a number of companies could experience further challenges. Risks such as the coronavirus pandemic are known unknowns that may yet have a negative influence on the economy's outlook in the early part of 2021. As such, it is crucial to adopt a long-term outlook on REIT stocks. Over the coming years, their low valuations, diverse portfolios and recovery potential could produce a growing passive income.

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on REITs

A health professional sits contemplating in the corridor of a hospital.
REITs

Healthco Healthcare and Wellness REIT rips 17% higher on Healthscope update

HCW REIT owns several hospitals leased to private operator, Healthscope, which is now in receivership.

Read more »

Woman and man calculating a dividend yield.
REITs

What price target does Macquarie have on Goodman Group shares?

Goodman Group posted an interesting set of numbers in Q3. Here's Macquarie's take.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Dividend Investing

Looking for passive income amid falling interest rates? Check out this top ASX All Ords dividend stock

This high-yielding ASX dividend stock can help boost your passive income amid falling interest rates.

Read more »

Image of a shopping centre.
REITs

Capitalising on interest rate cuts: Should I buy an ASX REIT?

REITs tend to benefit more than most from interest rate cuts.

Read more »

Magnifying glass in front of an open newspaper with paper houses.
Real Estate Shares

5 ASX stocks making Macquarie's top picks in the listed property sector

Macquarie expects the future is looking brighter for these ASX real estate stocks. But why?

Read more »

ASX 200 shares broker downgrade origami paper fortune teller with buy hold sell and dollar sign options
REITs

Is the ASX Charter Hall Retail REIT a buy, hold, or sell, according to Macquarie?

The top broker has just released a new note about this popular ASX real estate investment trust.

Read more »

Two IT professionals walk along a wall of mainframes in a data centre discussing various things
REITs

Goodman begins building its first U.S data centre

This blue chip is making big steps with its data centre plans.

Read more »

Magnifying glass in front of an open newspaper with paper houses.
REITs

Real estate making a comeback? 2 ASX REITs rated as top buys

Is now the to look at ASX real estate names?

Read more »