Retire Early: Make a Growing Passive Income With REITs

REITs could offer inflation-beating income returns over the long run.

The potential to generate a growing passive income through investing in real estate investment trusts (REITs) remains high.

Certainly, there are fears surrounding the outlook for the global economy, with trade tensions between the US and China being high.

However, with the prospect of a loose monetary policy being pursued by many of the world’s major central banks, the industry may experience continued growth over the medium term.

Favourable operating conditions

Since the financial crisis, global property prices have benefitted significantly from an accommodative monetary policy that has been pursued by a number of central banks. Policies such as lower interest rates and the Federal Reserve’s asset repurchase program have improved confidence among investors, which has led to rising asset prices.

Looking ahead, there could be a continuation of this trend in the medium term. Weak economic data in the US means that a cut in interest rates is becoming increasingly likely. Certainly, the previously expected rise in interest rates after the upward movements in previous months is now unlikely. This could mean that the global economy, and thereby asset prices, gains a boost over the medium term.

Cyclicality

Although property prices may have faced an uncertain period of late, their long-term track record has generally been favourable. Therefore, investing in REITs is likely to be a beneficial strategy to investors who are seeking to generate a passive income over the long run.

Even if property prices come under pressure in the short run, investors in REITs could benefit. It may be possible to buy attractive assets at below their intrinsic value; thereby creating greater scope for profitability through the cycle. Since REITs generally have impressive income returns that may prove to be sustainable even during challenging operating conditions, investors in them may have the cash flow required to increase their exposure the sector during periods of uncertainty. This could help them to maximise their long-term returns.

Debt

Although the property industry may have a solid track record of growth and could benefit from a dovish global interest rate environment, ensuring that REITs have modest leverage could be a sound idea.

This could help investors to avoid potential losses. It may also ensure they invest in companies that could be better-placed to capitalise on possible opportunities which may be ahead during more challenging parts of the property cycle.

Focused growth

With the world economy continuing to evolve towards a digital future, investors may wish to focus on REITs that have exposure to faster-growing segments of the economy.

For example, consumers are increasingly comfortable buying goods online. This may mean that demand for warehouses increases and retail units are gradually converted to office or residential space. As a result, REITs that own vast swathes of retail units may be unable to deliver the level of returns that companies with portfolios that are focused on warehousing can offer.

Overall, though, the sector appears to have a favourable long-term outlook. Through diversifying and adopting a buy-and-hold strategy, REITs look set to offer a growing passive income for investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

ETF chart stocks
Investing

Here Are My 2 Favourite ETFs for 2025

These are the ETFs I'll be eyeballing in the New Year.

Read more »

money goes up and down in balance
Dividend Stocks

This 6% Dividend Stock Is My Top Pick for Immediate Income

This Canadian stock has resilient business model, solid dividend payment and growth history, and a well-protected yield of over 6%.

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Outlook for Cenovus Energy Stock in 2025

A large-cap energy stock and TSX30 winner is a screaming buy for its bright business outlook and visible growth potential.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Stock Market

CRA: Here’s the TFSA Contribution Limit for 2025

The TFSA is a tax-sheltered account that allows you to hold diversified asset classes at a low cost.

Read more »

Hourglass and stock price chart
Tech Stocks

1 Canadian Stock Ready to Surge Into 2025

There is a lot of uncertainty about the market in general as we move closer to the following year, but…

Read more »

think thought consider
Stock Market

Billionaires Are Selling Apple Stock and Picking up This TSX Stock Instead

Billionaires like Warren Buffett continue to trim stakes in Apple stock, with others picking up this long-term stock instead.

Read more »

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

canadian energy oil
Energy Stocks

Is Baytex Energy Stock a Good Buy?

Baytex just hit a 12-month low. Is the stock now oversold?

Read more »