How to Build a High-Quality Passive Income-Producing Real Estate Portfolio for Less Than $250 at a Time

Investing in real estate can be a fantastic way to generate passive income. Rental properties typically throw off more cash than their monthly expenses, enabling investors to pocket the difference as passive income.

There are lots of ways to invest in rental properties. The easiest for beginners is to invest in real estate investment trusts (REITs). These entities are low-cost and as passive as they get (no management is necessary).

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Three great REITs for beginners to buy are Realty Income (NYSE: O), Invitation Homes (NYSE: INVH), and Extra Space Storage (NYSE: EXR). You can buy a share of each for less than $250 combined. That low cost allows you to steadily grow your real estate portfolio whenever you have an extra $250 or so to spare.

A core real estate holding

Realty Income is almost like a one-stop shop for real estate investing. The diversified REIT owns 15,450 properties across all 50 states and several European countries. It owns retail (79.4% of its base rent), industrial (14.6%), casinos (3.2%), and other properties like data centers (2.8%). The REIT focuses on owning free-standing properties secured by long-term net leases. Those rental agreements provide predictable rental income because the tenant covers all operating expenses, including routine maintenance, real estate taxes, and building insurance.

The REIT lives up to its name. Realty Income pays a monthly dividend ($0.264 per share or $3.168 annualized), which is great for those seeking passive income. With its share price recently around $55 apiece, it yields 5.8%.

Realty Income has increased its payment 128 times since going public in 1994 (109 straight quarters and 30 consecutive years). The dividend grew at a 4.3% compound annual rate during that time.

The company should be able to continue increasing its dividend in the future. It has one of the strongest financial profiles in the REIT sector, giving it ample financial flexibility to continue expanding its portfolio of income-generating properties. Meanwhile, it has a massive growth runway, given that trillions of dollars of commercial real estate are suitable for net leases.

Extra-sized income growth

Extra Space Storage is the leading self-storage REIT. It owns or manages 3,862 properties with 296 million square feet of rentable space across 42 states, giving it an industry-leading 14% market share. It also has the sector's leading third-party management platform, which provides stable income from management fees.

The REIT pays a $1.62-per-share dividend each quarter ($6.48 annually). With shares costing around $155 apiece, the REIT offers a 4.2% yield.

Extra Space's dividend payment has more than tripled over the past decade. It has benefited from growing demand for self-storage space across the country. That has kept occupancy levels high, enabling the REIT to steadily raise rental rates. It has also steadily capitalized on opportunities to expand its owned portfolio and third-party management platform, including buying fellow self-storage REIT Life Storage for $15 billion last year. The company has a strong balance sheet, giving it ample financial flexibility to continue expanding its leading self-storage portfolio.

A leading landlord

Invitation Homes is a residential REIT focused on single-family homes. The company owns or manages over 110,000 homes across 16 core markets. It focuses on metro areas where the population and jobs are growing at above-average rates. That keeps occupancy levels high while driving strong rental growth rates.

The REIT recently raised its dividend payment by another 3.6% to $0.29 per share each quarter ($1.16 annualized). With a share price of less than $35, the REIT has a 3.6% yield.

Invitation Homes should be able to continue increasing its dividend, which it has done each year since it came public in 2017. In addition to rent growth across its existing portfolio, the REIT routinely buys additional rental properties. It recently invested $50 million into a joint venture that will invest in newly built homes and communities in several high-growth markets. It also has a pipeline of about 2,500 homes under construction it has agreed to buy from builders. The REIT has also been growing its third-party management business, which generates stable and growing management fees.

High-quality REITs

Realty Income, Invitation Homes, and Extra Space Storage are great REITs for beginning real estate investors to buy. They own high-quality real estate portfolios spanning retail, industrial, self-storage, single-family rentals, and other property types, giving investors exposure to diverse segments of the real estate market. They also have rock-solid financial profiles. Because of that, they should be able to continue increasing their attractive dividends. Investors can get all that income and diversification while spending less than $250, a low price point to start building a high-quality portfolio of income-generating real estate.

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Matt DiLallo has positions in Invitation Homes and Realty Income. The Motley Fool has positions in and recommends Invitation Homes and Realty Income. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.