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Historically, investing in property’s been a great way to make a strong and sustainable second income. Buy-to-let was particularly popular with those looking to invest their savings.
Rental contracts meant they could expect a dependable passive income, even during economic downturns. And soaring property prices meant that buy-to-let investors booked jawdropping profits when they eventually came to sell up.
But conditions have become a lot tougher for private landlords over the past decade. So I’d forget buy-to-let. Here, I’ll reveal what I think’s a much better way to make money from the UK property market.
Fading appeal
But before I do, let’s quickly look at why buy-to-let’s become increasingly unattractive with Britons.
The Tenant Fees Act in 2019 brought in measures like transferring certain costs from tenants to landlords, and capping deposits. The restriction of mortgage interest relief and higher stamp duty on second properties has also had an impact.
Property owners have faced higher mortgage costs since the Bank of England began hiking interest rates.
The effect of all of this has been big. According to price comparison website Finder, the average landlord in April made £4,000 less a year in profit than in 2020, despite monthly rents shooting steadily higher.
Better property buys?
It’s still possible to make money as a landlord, but I’d rather find other ways to make money with bricks and mortar.
Fortunately, UK share investors have what I consider to be an excellent alternative to buy-to-let. Real estate investment trusts (REITs) are companies that invest in a pool of properties in one or across multiple sectors.
We’re talking about hospitals, shopping centres, offices, factories and hotels, for instance. This gives investors a lot of choice, and allows them to spread risk across a wide variety of properties.
Investors also don’t have to pay large upfront sums to get involved with REITs. And under sector rules, these companies must pay at least 90% of annual rental profits out in the form of dividends.
Buy-to-let does have some advantages over a REIT. The investor has direct control over which assets to buy or sell. And while REIT share prices can fluctuate, buy-to-let property prices tend to be more stable.
But on balance, I think investment trusts would be a better choice for me.
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A top REIT
Grainger (LSE:GRI) — which trades at 240p per share — is one such stock I’d buy if I had cash to invest. With 11,153 residential properties on its books, it can still pay a decent income to its investors even if some of its tenants fail to pay the rent.
In fact, dividends here have risen almost every year over the past 10 years, thanks to those fast-rising rents mentioned before. And City analysts expect them to continue rising over the next few years, pushing a decent yield of 3.1% for this year to 3.5% and 3.9% in 2025 and 2026 respectively.
A £20,000 investment in Grainger shares today could give me dividends totalling £620 this year alone. And I think they would provide me with a growing passive income over time, given the favourable outlook for the UK rentals sector.
Potential changes to rental legislation could impact investor returns further down the line. But, on balance, I think investing in Grainger’s worth serious consideration from investors seeking a second income.