Are REIT worth it and is it a good option to generate passive income for a while?
One way is to think of a REIT as a fully managed portfolio of real estate investments. Risks and returns are averaged across the real estate portfolio and managed by experts, possibly industry leading experts.  REITs have a well documented track record you can research - most individuals do not. Many individuals have learned a hard lesson or two while attempting to generate passive income with real estate. Conversely, some people derive a great deal of satisfaction from owning real estate and have a true passion to do so.  Plus, if you are expecting interest rates to raise and/or rate of inflation to increase in the next 30 years, you may benefit from the financing aspects of the investment as well.  There are some regions/ opportunities that seem to do better than the average REIT a majority of the time, but may not be desirable to you or fit into your budget for various reasons. I'm not sure what your level of experience, knowledge or financial situation , but for everyone considering, there are many additional things to know about investment property compared to a primary residence.  A good place to start with REITs is the prospectus of one that interests you.  Research their holdings, create a model, or otherwise make a connection with the REIT before clicking buy. "In financial markets, the gains you can expect to make (whether in the form of dividends or capital gains) correspond to the risks you are bearing.  There are a variety of REITs but you can expect to make only as much money in them as you bear risk (meaning you can also lose a lot of money in the ones that earn a lot).  In that sense they are just like other financial assets like stocks. If you are generically trying to increase your wealth by bearing risk, you can get a better risk/reward ratio in a fully diversified portfolio including stocks and bonds as well and REITs.  ""Passive income"" means making money by bearing risk.  REITs alone, without diversifying into other financial assets, do a poor job of generating income for the amount of risk you bear. So why are REITs not very comparable to buying a house and renting it out?  Because in the latter case you are being paid not only for bearing the risk of the house depreciating but also you are being compensated for the work you do as a landlord.  Moreover, because the house doesn't trade in a liquid market like REITs do, it is possible to actually get a good deal, as opposed to the fair deal you will get on a REIT. TL;DR: The ""passive income"" generated by REIT investment is more similar to generic equity/bond investment than it is to an investment in a physical home that you rent out.  If what you want is to make money without doing anything besides bear risk, you should invest in a fully diversified portfolio of financial assets (equity and bonds being the primary constituents but REITs potentially being a part as well)." There are tax strategies you could take advantage of if you own the property. Find local real estate investors that like 'buy and hold'. Additional strategy is to buy a property and sell it with owner financing (you use a Residential Mortgage Loan Officer to facilitate.) What is great is you can get a great % real return on your money without being a landlord. "Other individuals answered how owning an REIT compares to an individual real estate investment, but did not answer your second question as readily, ""are REITs a good option to generate passive income for awhile?"". The ""awhile"" part is quite important in answering this question. If your intentions are to invest for a relatively short time period (say, 7 years or less), it may be especially advantageous to invest in a REIT. The foremost advantage comes from significantly lower transaction fees (stock/ETF trades are practically/potentially free today) compared to purchasing real estate, which involves inspection+titling fees/taxes/broker fees, which in a round-trip transaction (purchase and sale) would come to ~10%. The secondary advantage to owning a REIT is they are much more liquid than a property. If you wanted to sell your investment at a given point in time, you can easily log into your brokerage and execute your transaction, while liquidating an investment property will take time on market/potentially tossing tenants/fixing up place, etc. On the other hand, illiquid investments have generally yielded higher historical returns according to past research."
If you are able to buy a 150K home for 50K now that would be a good deal!  However, you can't you have to borrow 100K in order to make this deal happen.  This dramatically increases the risk of any investment, and I would no longer classify it as passive income.   The mortgage on a 150K place would be about 710/month (30 year fixed).  Reasonably I would expect no more than 1200/month in rent, or 14,400.  A good rule of thumb is to assume that half of rental revenue can be counted as profit before debt service.  So in your case 7200, but you would have a mortgage payment of 473/month.  Leaving you a profit of 1524 after debt service.  This is suspiciously like 2K per year.  Things, in the financial world, tend to move toward an equilibrium. The benefit of rental property you can make a lot more than the numbers suggest.  For example the home could increase in value, and you can have fewer than expected repairs.  So you have two ways to profit:  rental revenue and asset appreciation. However, you said that you needed passive income.  What happens if you have a vacancy or the tenant does not pay?  What happens if you have greater than expected repairs?  What happens if you get a fine from the HOA or a special assessment?  Not only will you have dip into your pocket to cover the payment, you might also have to dip into your pocket to cover the actual event! In a way this would be no different than if you borrowed 100K to buy dividend paying stocks.  If the fund/company does not pay out that month you would still have to make the loan payment.  Where does the money come from?  Your pocket.  At least dividend paying companies don't collect money from their shareholders. Yes you can make more money, but you can also lose more.  Leverage is a two edged sword and rental properties can be great if you are financial able to absorb the shocks that are normal with ownership. I assume having real estate in a good popular city is much more secure way of keeping money than having it in a bank account Not at all!  Many things can go wrong with rental property. Renters can be late on rent, they can cause damage to property, you can have unexpected repairs. I'm not saying that you should just let it sit, but rental property is not risk-free my any means. Are you prepared to be a landlord as a part time job (for 500/mo?).  Rental property is not passive income - it takes work to maintain.  You can outsource this to a property manager, but that eats into the 500/mo that you are estimating). I want to stay flexible and have a possibility to change my location whenever I want. That's a perfectly reasonable reason not to buy a home, but what will you do with the rental when you move? It will still need maintenance, you'll still need to interact with renters, etc. I'm not saying you shouldn't do this, but I get the feeling that you are not fully aware of the risks involved in rental properties. I would just buy a low-cost diversified equity ETF. VTI is pretty solid. Also, JW are you working or in school? If you are working you should consider opening an IRA or Roth IRA. Also if your employer has a 401k or other retirement plan you can contribute to I would advise doing so. "Scenario 1: Assume that you plan to keep the parking space for the rest of your life and collect the income from the rental. You say these spaces rent for $250 per month and there are fees of $1400 per year. Are there any other costs? Like would you be responsible for the cost of repaving at some point? But assuming that's covered in the $1400, the net profit is 250 x 12 - 1400 = $1600 per year. So now the question becomes, what other things could you invest your money in, and what sort of returns do those give? If, say, you have investments in the stock market that are generating a 10% annual return and you expect that rate of return to continue indefinitely, than if you pay a price that gives you a return of less than 10%, i.e. if you pay more than $16,000, then you would be better off to put the money in the stock market. That is, you should calculate the fair price ""backwards"": What return on investment is acceptable, and then what price would I have to pay to get that ROI? Oh, you should also consider what the ""occupancy rate"" on such parking spaces is. Is there enough demand that you can realistically expect to have it rented out 100% of the time? When one renter leaves, how long does it take to find another? And do you have any information on how often renters fail to pay the rent? I own a house that I rent out and I had two tenants in a row who failed to pay the rent, and the legal process to get them evicted takes months. I don't know what it takes to ""evict"" someone from a parking space. Scenario 2: You expect to collect rent on this space for some period of time, and then someday sell it. In that case, there's an additional piece of information you need: How much can you expect to get for this property when you sell it? This is almost surely highly speculative. But you could certainly look at past pricing trends. If you see that the value of a parking space in your area has been going up by, whatever, say 4% per year for the past 20 years, it's reasonable to plan on the assumption that this trend will continue. If it's been up and down and all over the place, you could be taking a real gamble. If you pay $30,000 for it today and when the time comes to sell the best you can get is $15,000, that's not so good. But if there is some reasonable consistent average rate of growth in value, you can add this to the expected rents. Like if you can expect it to grow in value by $1000 per year, then the return on your investment is the $1600 in rent plus $1000 in capital growth equals $2600. Then again do an ROI calculation based on potential returns from other investments." I would not claim to be a personal expert in rental property. I do have friends and family and acquaintances who run rental units for additional income and/or make a full time living at the rental business.  As JoeTaxpayer points out, rentals are a cash-eating business. You need to have enough liquid funds to endure uncertainty with maintenance and vacancy costs. Often a leveraged rental will show high ROI or CAGR, but that must be balanced by your overall risk and liquidity position. I have been told that a good rule-of-thumb is to buy in cash with a target ROI of 10%. Of course, YMMV and might not be realistic for your market. It may require you to do some serious bargain hunting, which seems reasonable based on the stagnant market you described. Some examples: The main point here is assessing the risk associated with financing real estate. The ROI (or CAGR) of a financed property looks great, but consider the Net Income. A few expensive maintenance events or vacancies will quickly get you to a negative cash flow. Multiply this by a few rentals and your risk exposure is multiplied too!  Note that i did not factor in appreciation based on OP information. Cash Purchase with some very rough estimates based on OP example Net Income = (RENT - TAX - MAINT) = $17200 per year Finance Purchase rough estimate with 20% down Net Income = (RENT - MORT - TAX - MAINT) = $7500 per year "There's no such thing as true ""passive income."" You are being paid the risk free rate to delay consumption (i.e., the super low rate you are getting on savings accounts and CDs) and a higher rate to bear risk. You will not find truly risk-free investments that earn more than the types of investments you have been looking at...most likely you will not keep up with inflation in risk-free investments. For a person who is very risk averse but wants to make a little more money than the risk-free rate, the solution is not to invest completely in slightly risky things.  Instead the best thing you can do is invest partially in a fully diversified portfolio.  A diversified portfolio (containing stocks, bonds, etc) will earn you the most return for the given amount of risk.  If you want very little risk, put very little in that portfolio and keep the rest in your CDs. Put 90% of your money in a CD or something and the other 10% in stocks/bonds.  Or choose a different percentage. You can also buy real assets, like real estate, but you will find yourself taking a different type of risk and doing a different type of work with those assets." "Rather than thinking of becoming a landlord as a passive ""investment"" (like a bank account or mutual fund), it may be useful to think of it as ""starting a small part-time business"". While certainly many people can and do start their own businesses, and there are many success stories, there are many cases where things don't work out quite as they hoped. I wouldn't call starting any new business ""low risk"", even one that isn't expected to be one's main full-time job, though some may be ""acceptable risk"" for your particular circumstances. But if you're going to start a part-time business, is there any particular reason you'd do so in real estate as opposed to some other activity? It sounds like you'd be completely new to real estate, so perhaps for your first business you're starting you'd want it to be something you're more familiar with. Or, if you do want to enter the real estate world (or any other new business), be sure to do a lot of research, come up with a business plan, and be prepared for the possibility of losing money as with any investment or new business." I am not going to argue the merits of investing in real estate (I am a fan I think it is a great idea when done right).  I will assume you have done your due diligence and your numbers are correct, so let's go through your questions point by point. What would be the type of taxes I should expect?  NONE. You are a real estate investor and the US government loves you. Everything is tax deductible and odds are your investment properties will actually manage to shelter some of your W2(day job) income and you will pay less taxes on that too.  Obviously I am exaggerating slightly find a CPA (certified public accountant) that is familiar with real estate, but here are a few examples. I am not a tax professional but hopefully this gives you an idea of what sort of tax benifits you can expect.   How is Insurance cost calculated?  Best advice I have call a few insurance firms and ask them.  You will need landlord insurance make sure you are covered if a tenant gets hurt or burns down your property. You can expect to pay 15%-20% more for landlord insurance than regular insurance (100$/month is not a bad number to just plug in when running numbers its probably high).  Also your lease should require tenants to have renters insurance to help protect you. Have a liability conversation with a lawyer and think about LLCs.   How is the house price increase going to act as another source of income?  Appreciation can be another source of income but it is not really that useful in your scenario.  It is not liquid you will not realize it until you sell the property and then you have to pay capital gains and depreciation recapture on it.  There are methods to get access to the gains on the property without paying taxes.  This is done by leveraging the property, you get the equity but it is not counted as capital gains since you have to pay it back a mortgage or home equity lines of credit (HELOC) are examples of this.  I am not recommending these just making sure you are aware of your options. Please let me know if I am calculating anything wrong but my projection for one year is about $8.4k per house (assuming no maintenance is needed) I would say you estimated profit is on the high side.  Not being involved in your market it will be a wild guess but I would expect you to realize cash-flow per house per year of closer to $7,000.  Maybe even lower given your inexperience.  Some Costs you need to remember to account for: Taxes, Insurance, Vacancy, Repairs, CapEx, Property Management, Utilities, Lawn Care, Snow Removal, HOA Fees. All-in-all expect 50% or your rental income to be spent on the property.  If you do well you can be pleasantly surprised. "If I invest in index funds or other long term stocks that pay dividend which I reinvest, they don't need to be worth more per share for me to make a profit, right? That is, if I sell part of the stocks, it's GOOD if they're worth more than I bought them at, but the real money comes from the QUANTITY of stocks that you get by reinvesting your dividends, right? I would say it is more the other way around.  It is nice to get dividends and reinvest them, but overall the main gain comes from the stocks going up in value. The idea with index funds, however, is that you don't rely on any particular stock going up in value; instead you just rely on the aggregate of all the funds in the index going up.  By buying lots of stocks bundled in an index fund, you avoid being too reliant on any one company's performance. Can I invest ""small amounts"" (part of paycheck) into index funds on a monthly basis, like €500, without taking major ""transaction fees""? (Likely to be index fund specific... general answers or specific answers using popular stocks welcomed). Yes, you can.  At least in the US, whether you can do this automatically from your paycheck depends on whether you employer has that set up.  I don't know that work in the Netherlands.  However, at the least, you can almost certainly set up an auto-invest program that takes $X out of your bank account every month and buys shares of some index fund(s). Is this plan market-crash proof? My parents keep saying that ""Look at 2008 and think about what such a thing would do to your plan"", and I just see that it will be a setback, but ultimately irrelevant, unless it happens when I need the money. And even then I'm wondering whether I'll really need ALL of my money in one go. Doesn't the index fund go back up eventually? Does a crash even matter if you plan on holding stocks for 10 or more years? Crashes always matter, because as you say, there's always the possibility that the crash will occur at a time you need the money.  In general, it is historically true that the market recovers after crashes, so yes, if you have the financial and psychological fortitude to not pull your money out during the crash, and to ride it out, your net worth will probably go back up after a rough interlude.  No one can predict the future, so it's possible for some unprecedented crisis to cause an unprecedented crash.  However, the interconnectedness of stock markets and financial systems around the world is now so great that, were such a no-return crash to occur, it would probably be accompanied by the total collapse of the whole economic system.  In other words, if the stock market dies suddenly once and for all, the entire way of life of ""developed countries"" will probably die with it.  As long as you live in such a society, you can't really avoid ""gambling"" that it will continue to exist, so gambling on there not being a cataclysmic market crash isn't much more of a gamble. Does what I'm planning have similarities with some financial concept or product (to allow me to research better by looking at the risks of that concept/product)? Maybe like a mortgage investment plan without the bank eating your money in between? I'm not sure what you mean by ""what you're planning"".  The main financial products relevant to what you're describing are index funds (which you already mentioned) and index ETFs (which are basically similar with regard to the questions you're asking here).  As far as concepts, the philosophy of buying low-fee index funds, holding them for a long time, and not selling during crashes, is essentially that espoused by Jack Bogle (not quite the inventor of the index fund, but more or less its spiritual father) and the community of ""Bogleheads"" that has formed around his ideas.  There is a Bogleheads wiki with lots of information about the details of this approach to investing.  If this strategy appeals to you, you may find it useful to read through some of the pages on that site." Your approach sounds solid to me.  Alternatively, if (as appears to be the case) then you might want to consider devoting your tax-advantaged accounts to tax-inefficient investments, such as REITs and high-yield bond funds.  That way your investments that generate non-capital-gain (i.e. tax-expensive) income are safe from the IRS until retirement (or forever).  And your investments that generate only capital gains income are safe until you sell them (and then they're tax-cheap anyway). Of course, since there aren't really that many tax-expensive investment vehicles (especially not for a young person), you may still have room in your retirement accounts after allocating all the money you feel comfortable putting into REITs and junk bonds.  In that case, the article I linked above ranks investment types by tax-efficiency so you can figure out the next best thing to put into your IRA, then the next, etc. "is it worth it? You state the average yield on a stock as 2-3%, but seem to have come up with this by looking at the yield of an S&P500 index.  Not every stock in that index is paying a dividend and many of them that are paying have such a low yield that a dividend investor would not even consider them.  Unless you plan to buy the index itself, you are distorting the possible income by averaging in all these ""duds"". You are also assuming your income is directly proportional to the amount of yield you could buy right now.  But that's a false measure because you are talking about building up your investment by contributing $2k-$3k/month.  No matter what asset you choose to invest in, it's going to take some time to build up to asset(s) producing $20k/year income at that rate.  Investments today will have time in market to grow in multiple ways. Given you have some time, immediate yield is not what you should be measuring dividends, or other investments, on in my opinion.  Income investors usually focus on YOC (Yield On Cost), a measure of income to be received this year based on the purchase price of the asset producing that income.  If you do go with dividend investing AND your investments grow the dividends themselves on a regular basis, it's not unheard of for YOC to be north of 6% in 10 years.  The same can be true of rental property given that rents can rise. Achieving that with dividends has alot to do with picking the right companies, but you've said you are not opposed to working hard to invest correctly, so I assume researching and teaching yourself how to lower the risk of picking the wrong companies isn't something you'd be opposed to. I know more about dividend growth investing than I do property investing, so I can only provide an example of a dividend growth entry strategy: Many dividend growth investors have goals of not entering a new position unless the current yield is over 3%, and only then when the company has a long, consistent, track record of growing EPS and dividends at a good rate, a low debt/cashflow ratio to reduce risk of dividend cuts, and a good moat to preserve competitiveness of the company relative to its peers.  (Amongst many other possible measures.)  They then buy only on dips, or downtrends, where the price causes a higher yield and lower than normal P/E at the same time that they have faith that they've valued the company correctly for a 3+ year, or longer, hold time. There are those who self-report that they've managed to build up a $20k+ dividend payment portfolio in less than 10 years.  Check out Dividend Growth Investor's blog for an example.  There's a whole world of Dividend Growth Investing strategies and writings out there and the commenters on his blog will lead to links for many of them. I want to point out that income is not just for those who are old.  Some people planned, and have achieved, the ability to retire young purely because they've built up an income portfolio that covers their expenses.   Assuming you want that, the question is whether stock assets that pay dividends is the type of investment process that resonates with you, or if something else fits you better.  I believe the OP says they'd prefer long hold times, with few activities once the investment decisions are made, and isn't dissuaded by significant work to identify his investments.  Both real estate and stocks fit the latter, but the subtypes of dividend growth stocks and hands-off property investing (which I assume means paying for a property manager) are a better fit for the former.  In my opinion, the biggest additional factor differentiating these two is liquidity concerns.  Post-tax stock accounts are going to be much easier to turn into emergency cash than a real estate portfolio.  Whether that's an important factor depends on personal situation though." DRiPs come to mind as something that may be worth examining. If you take the Microsoft example, consider what would happen if you bought additional shares each year by re-investing the dividends and the stock also went up over the years. A combination of capital appreciation in the share price plus the additional shares purchased over time can produce a good income stream over time. The key is to consider how long are you contributing, how much are you contributing and what end result are you expecting as some companies can have larger dividends if you look at REITs for example. I would add to this that, while everyone is right on trading, there are certain special situations you could look into that could turn a profit in a relatively short time frame (one month, say).   A recent example is Northstar Realty Finance (NRF). I bought in at $16.50 prior to a spinoff, sold half (the spinoff company) at $18.75 within a month, and the other half (the REIT) has since paid a 50 cent dividend and gone up to mid $18s as well within a total of just over 2 months. (This admittedly sounds like bragging, which isn't intended- I just want to give an example of a short term position resulting in a gain, and I don't know any off the top of my head except the one I did recently).   This isn't trading, but it is a short term position that would have turned a profit with $1800. I still wouldn't recommend it, considering commissions eats a sizable portion. But if you want to take short term positions, you don't need as much as you would to be a day trader.   I would read Seth Klarman's Margin of Safety, the sections on spinoffs and bankruptcy. They provide some useful information on some short term positions. However, also be aware that you should be willing to hold any short term position as a long term position if it does not immediately work out. By way of example, I believed NRF would go up post spinoff but the spinoff company stay the same. Instead, NRF stayed the same and the spinoff went up. But NRF was undervalued, so I held it for another month.   Just my advice. As far as learning goes- use play money. But if you never are going to have enough money to really trade with, hopefully my info on short-term positions is helpful. "I have been a landlord in Texas for just over 3 years now. I still feel like a novice, but I will give you the benefit of my experience. If you are relying on rental properties for current income versus a long term return you are going to have to do a good job at shopping for bargains to get monthly cash flow versus equity growth that is locked up in the property until you sell it.  If you want to pull a lot of cash out of a property on a regular basis you probably are going to have to get into flipping them, which is decidedly not passive investing. Also, it is easy to underestimate the expenses associated with rental properties. Texas is pretty landlord friendly legally, however it does have higher than usual property taxes, which will eat into your return. Also, you need to factor in maintenance, vacancy, tenant turnover costs, etc. It can add up to a lot more than you would expect. If you are handy and can do a lot of repairs yourself you can increase your return, but that makes it less of a passive investment. The two most common rules I have heard for initially evaluating whether an investment property is likely to be cash flow positive are the 1% and 50% rules. The 1% rule says the expected monthly rent needs to be 1% or greater of the purchase price of the house. So your hypothetical $150K/$10K scenario doesn't pass that test. Some people say this rule is 2% for new landlords, but in my experience you'd have to get lucky in Texas to find a house priced that competitively that didn't need a lot of work to get rents that high. The 50% rule says that the rent needs to be double your mortgage payment to account for expenses. You also have to factor in the hassle of dealing with tenants, the following are not going to happen when you own a mutual fund, but are almost inevitable if you are a landlord long enough: For whatever reason you have to go to court and evict a tenant. A tenant that probably lost their job, or had major medical issues. The nicest tenant you ever met with the cutest kids in the world that you are threatening to make homeless. Every fiber of your being wants to cut them some slack, but you have a mortgage to pay and can't set an expectation that paying the rent on time is a suggestion not a rule. or the tenant, who seemed nice at first, but now considers you ""the man"" decides to fight the eviction and won't move out. You have to go through a court process, then eventually get the Sheriff to come out and forcibly remove them from the property, which they are treating like crap because they are mad at you. All the while not paying rent or letting you re-let the place. The tenant isn't maintaining the lawn and the HOA is getting on your butt about it. Do you pay someone to mow the grass for them and then try to squeeze the money out of the tenant who ""never agreed to pay for that""?  You rent to a college kid who has never lived on their own and has adopted you as their new parent figure. ""The light in the closet went out, can you come replace the bulb?"" Tenants flat out lying to your face. ""Of course I don't have any pets that I didn't pay the deposit for!"" (Pics all over facebook of their kids playing with a dog in the ""pet-free"" house)" 2 very viable options.  Real Estate is cheap now and if you hold a few properties for the long term the price should rise.  You can use them as rental properties to supplement your income.  In addition agriculture is also very viable.  How else you gunna feed 7 billion?  Might as well cash in on that.