Owning property and renting it out can be a great way to generate a second income. But it can be a challenging business.
Buying properties to let out requires significant amounts of cash and/or debt. It also involves work in the form of finding a tenant, maintaining the property, and organising contracts.
There is a way around all of this, though, that I think is much more appealing. Instead of buying a property to rent out, an investor can buy shares in a real estate investment trust (REIT) that trades on the stock market.
By investing in a REIT, I could outsource all of the work to someone else. And it doesn’t need a huge outlay – investors can start earning passive income today with as little as £1.
First things first: what are REITs? The basic idea is that a REIT is an organisation that owns a portfolio of properties and makes money by renting them out.
These can be any kinds of properties – housing, offices, warehouses, and more. Different REITs own different types of properties.
All of them have a few things in common, though. They all have the majority of their assets in real estate and they make most of their money from these assets.
Importantly, in order to qualify as a REIT, an organisation has to distribute at least 90% of its taxable income to its shareholders. I think this makes them great passive income investments.
I think that investing in a REIT is one of the best ways to earn passive income through property. It’s just that much more straightforward than taking on a buy-to-let property.
Not having the work associated with a buy-to-let frees up an investor to use their time to make money in other ways. Then they can use the money they make to increase their investment and grow their passive income.
Like all investments, REITs come with risks. There are things that investors need to consider before jumping into one.
The main thing to consider is how likely it is that a company is going to be unable to collect its full rent each month. This can happen for one of two reasons.
First, the tenants might not be able to pay the rent. This is much more likely to be the case when the tenant’s business is under pressure or has a low credit rating.
To guard against this risk, it’s important to focus on REITs that have high quality occupants in their buildings. Realty Income is a good example of this.
Second, the landlord might not even be able to find a tenant at all. This can be especially risky where buildings have specific uses, such as hospitals.
In my view, the best way to avoid this is by focusing properties in desirable locations. With its portfolio of retail units in densely-populate areas, Federal Realty Investment does this very well.
Investing in real estate
Overall, I think that REITs are the best way to earn a second income by investing in property. Investing in them has some significant advantages over buying to let.
Not needing huge amounts of capital to get started is one. And being able to outsource the work to someone else is another.
The post How to earn a second income by investing in property appeared first on The Motley Fool UK.
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Stephen Wright has positions in Realty Income. 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.