Buy-to-let investing is popular in the UK. But I believe that if income is the goal, there are better ways to invest in the UK property market.
Consider the costs, both in money and time, of buy-to-let. There are fees for valuation and a property survey, legal services, and arranging the mortgage. The mortgage needs to be paid off each month. If tenants are found via a letting agent, then it will need paying. There might be redecoration and furnishing costs. Landlord insurance and annual safety check costs add up, and the property has to be kept in good order. And income tax is payable on what remains of rental income after day to day running costs are subtracted.
A REIT good idea
There is another way to gain exposure to the UK property market. An investor can hold shares of a Real Estate Investment Trust (REIT) in a stocks and shares ISA. These companies invest in multiple properties and generate rental income. REITs are required to pay at least 90% of their rental profits in dividends and may be ideal for an investor hunting for income.
Whereas a buy-to-let investor will typically own a single house or flat, a REIT investor will have a stake in multiple properties, perhaps of different types. REITs may own numerous residential properties and entire apartment complexes, but can also invest in commercial real estate. Each REIT-owned property will have different tenants.
Diversification is important in investing. If a buy-to-let investor loses their tenant, or they don’t pay rent, they lose income. A REIT can spread the risk of empty properties and delayed and missed payment across many tenants of different types.
Property income
So if you are thinking of buy-to-let investing just for the rental income, I would suggest considering investing in REITs instead. As we have seen, there are far fewer hassles involved with buying a REIT versus buying an actual property. And risk is diversified across a professionally managed property portfolio with a REIT investment.
But importantly too, dividends paid by a REIT, if held inside an ISA, do not attract any tax. REITs are mostly exempt from corporation tax, meaning more of the rental income generated is available to pay investors their dividends. Compare that with the income tax payable through a buy-to-let investment.
And there are more complications if you want to exit buy-to-let. You will have to arrange the sale of the property, which is costly, and time-consuming. A REIT investor who wants to exit only has to sell their shares. Shares in REITs can also be inherited by loved ones, much like property can.
I own a couple of REITs. One is Unite Group which manages a portfolio of student housing. The other is Palace Capital, which owns multiple commercial properties across the UK. I like this combination. Unite has recently reported reservations for the next academic year are in line with the last. Palace has a good deal of regional exposure, which I believe will benefit from the government’s investment plans.
Buy-to-let income investors might want to look at REITs as an alternative. There are numerous REITs trading on the London Stock Exchange. I am sure an income-oriented investor can find one to their liking.
