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Why I’d buy these 3 UK property shares for a passive income rather than buy-to-let

Home key with house keyring with calculator.

Buy-to-let remains a very attractive investment class for many Britons. As does investing in UK shares that specialise in residential rentals. Looking at latest rent data from Zoopla it’s not difficult to see why.

A colossal shortage of these properties pushed the average private rent in Britain 4.6% higher year-on-year in September, Zoopla said. This represented a 13-year high. The property website said that supply of buy-to-let properties is currently running at 43% below the five-year average.

Zoopla expects private rents to rise 4.5% in 2022 too.

Why I’d ignore buy-to-let

Investing in buy-to-let used to be a lucrative way to get money working. And as the data above shows, rents in the UK continue to strengthen at breakneck pace. Residential property prices also continue to rocket, giving me the possibility of making big profits if, or when, I eventually decide to sell. Halifax data this week showed homes prices rising at their fastest pace for 15 years.

But I don’t believe that becoming a landlord is a good choice for me today. I’m reluctant to jump on the buy-to-let bandwagon because of the significant costs that landlords now face. It’s not just the 3% Stamp Duty levy introduced in 2016 that I’d have to worry about. The Tenant Fees Act introduced in 2019 has heaped more costs onto investors’ shoulders too.

Moreover, a swathe of new regulations related to improving property standards and safety are taking an extra bite out of landlord profits.

3 UK shares I’d rather buy

It’s my belief that things could get increasingly difficult for buy-to-let to make a profit too, as the government take steps to free up homes for first-time buyers. So I’d be happier to invest in UK shares, which would take the sting out of property rental for me. And there are stocks that can give me exposure to property rental.

The PRS REIT, Grainger and Residential Secure Income are three London stocks that specialise in letting out properties. Not only do they allow me to avoid the costs that buy-to-let investors have to face. Their scale means that investing in residential rentals is also much more cost effective.

On top of this, by buying these shares I don’t have to stump up colossal sums of money to get started. I don’t have to worry about Stamp Duty, property deposits, conveyancing fees and the like.

These UK property shares also give me a good chance to generate a decent passive income. Their forward dividend yields range from 1.9% at Grainger through to 5% at Residential Secure Income. The good thing about the PRS REIT and Residential Secure Income, too, is that they’re officially classified as real estate income trusts (or REITs). This means that they’re obligated to distribute at least 90% of annual profits to shareholders by way of dividends. 

Such stocks would help me exploit soaring UK rents and property prices without much of the cost and all of the effort that day-to-day property management entails. This is why I think buying them would be a no-brainer for me.

The post Why I’d buy these 3 UK property shares for a passive income rather than buy-to-let appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.