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.

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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.

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