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Forget buy-to-let, I’d buy real estate investment trusts

A couple celebrating moving in to a new home

According to the HomeLet Rental Index, average rents in the UK have reached £1,143 per month. It makes the thought of property investing attractive, doesn’t it? I own a buy-to-let property. But today I’d approach the market via real estate investment trusts (REITs) instead.

I’m not getting close to that £1,143 per month from my rented house. But over 30 years, it’s provided a decent income stream and has increased considerably in value. It hasn’t all been plain sailing, mind.

I do see attractions in real estate, and I would always want some investment in it. But let me explain why I’d go for REITs now.

I’ve had my ups and downs with buy-to-let. It’s not always as good as the headline annual yields we see bandied about. There have been lengthy voids, when I was paying the mortgage but getting no rent. Repairs and other expenses also mount up. One tenant scarpered owing months of rent, and took everything moveable, including the light bulbs.

Balancing risk

It’s all about the risks associated with owning a single property. When I invest in shares, I diversify my investments. I go for different stocks in different sectors.

A real estate investment trust provides diversification too, except with property. So instead of owning one whole house, I can instead have a small share in thousands of them, or a tiny portion of some office buildings or shopping centres.

If a disaster happens to one of them, the overall damage is greatly lessened. Just like general stock market diversification.

Dividends

To achieve REIT status, an investment company must pay out 90% of its taxable profits as dividends. So owning one produces steady income. That arrangement also means they don’t pay corporate income tax, which is nice.

A REIT is also more liquid. If I need a bit of extra cash one year, I could sell a few shares. I can’t really sell just one room, or a bit of the garden. Against that, though, a buy-to-let property forces a longer-term horizon on me.

Investing in commercial property might seem a bit double-edged at the moment, after the retail sector has taken a beating. But I reckon I’m seeing some attractive buys.

Cheap REITs?

NewRiver REIT suffered during lockdown. But it’s coming back a bit and has managed a 5% share price rise over the past 12 months. More importantly, we’re looking at forecast dividend yields of around 9%.

Primary Health Properties owns GP surgeries and medical centres. Demand for healthcare certainly wasn’t damaged by the pandemic. I see dependable long-term income, with dividend yields around 5%.

In the FTSE 100 with a £3.7bn market cap, there’s British Land Company with a 5.3% forecast dividend. Land Securities Group is valued at £4.6bn, on a forecast 6% yield.

Which to buy?

I wouldn’t buy any of these without further research, and they’ll have their individual risks. This is just a taster of what’s available in the REIT sector.

Today, I’d need to balance the benefits of getting all the rental income myself without paying any investment manager, against not having to do any work. The older I get, the easier that decision becomes.

The post Forget buy-to-let, I’d buy real estate investment trusts appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co, Landsec, and 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.