I’d forget buy-to-let and buy these REITs for passive income!

I think REITs are a great way to generate healthy streams of passive income. Here’s why I think they’re a better way to use my money than buy-to-let.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling senior white man talking through telephone while using laptop at desk.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Things are getting much tougher for the average buy-to-let investor. It’s why I believe that investing in a real estate investment trust (REITs) is a better way for me to play the property market.

Buy-to-let is still a good way that investors can capitalise on soaring residential property prices. But declining tax relief, increasing day-to-day costs, and rising regulatory requirements have all made this form of property investment less attractive.

New rules introduced in recent years mean that landlords have to work much harder to make a decent buck too

Profits halve

The pressure on buy-to-let investors is rising particularly badly as mortgage rates soar. In fact data from Hamptons has revealed a shocking fall in landlords’ profits due to these increased costs alone.

The average landlord paying a higher rate of tax has seen their profits more than halve year on year in the 12 months to June, the estate agent said.

And it warned that the average second property owner could even endure losses if the Bank of England raises interest rates to 2.5%. The benchmark rate was lifted to 1.75% last week to curb soaring inflation.

REIT benefits

I think a better way to get exposure to Britain’s property sector is to invest in real estate investment trusts (REITs). In particular, I think they’re a great way to generate long-term passive income.

To be classified as a REIT a property company must pay a minimum of 90% of their profits to shareholders. This leaves no room for the board to back out of paying a dividend. If the firm is profitable it must make dividend payments to its investors. And this can give an investor a reliable passive income.

There are other big benefits of buying shares in a REIT, such as:

  • They’re a tax-efficient way to invest in property.
  • They give investors exposure to sectors they wouldn’t usually have (like shopping malls and healthcare centres).
  • REITs attract large amounts of international capital that can be used to boost growth.
  • They usually have long-term lease contracts that provide supreme earnings visibility.

2 top REITs I’m watching

There are plenty of top REITs I’m considering buying for my own portfolio. Take Primary Health Properties, for instance, a UK share that boasts a healthy 4.5% dividend yield.

This property stock invests in primary healthcare facilities like GP surgeries and larger multi-use medical centres. Demand for these sorts of new properties is booming due to the crumbling condition of existing facilities. And I expect them to keep rising as Britain’s population ages and the nation’s healthcare needs consequently rise.

I’d buy Property Health Properties even though it faces intensifying competition for acquisitions. And I’d snap up Ediston Property Investment Company too, a stock with a mighty 6.4% dividend yield.

This REIT specialises in operating retail parks. It’s a property segment that’s tipped for strong growth due to its convenience, growing choice of stores and as  e-commerce boosts demand for ‘click and collect’ services. I’d buy Ediston despite the short-term threat of rising store vacancies as consumer spending weakens.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »