Forget buy to let! Here’s how I passively invest in real estate for a 5.5% yield

Buy-to-let property is simply too much work. Instead, I like to focus on real estate funds that offer steady dividends.

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Britons, like everyone else in the world, have relied for decades on rapidly escalating prices for real estate to secure their retirements. Now, it seems like the buy-to-let mania is finally being tempered. The government has raised stamp duty and reduced tax incentives for landlords, making property investment slightly less attractive and slightly more expensive. 

In my view, being a hands-on landlord was never very attractive to begin with. When you consider the vacancy rate (2.6% on average) and maintenance required for the average rental, it quickly becomes apparent that a buy-to-let investment is far from a genuinely passive source of income. 

Combine that with the average mortgage rate of 1.8% for a five-year fixed loan, and a rental yield of 3% to 5% seems even less attractive to me. Instead, I’d rather focus on my day job and invest all my savings into a real estate investment trust that offers a higher yield for much less effort. 

A quick example

British Land (LSE:BLND), is an excellent example of the sort of investment I prefer. The trust currently owns and manages a portfolio of real estate assets collectively worth £15.4bn. Only 10% of the assets are residential, while the rest are either office spaces or retail units spread across the country. 

Since the portfolio is heavily weighted towards commercial properties, I expect the company to be able to extract a higher rental yield and strike longer lease agreements for units that businesses and institutions rely on. This should ultimately translate to better profitability and stable dividends over time. 

Sure enough, British Land currently offers a quarterly dividend of 7.98p, which implies a 5.2% dividend yield at the current market price per share. Dividends have grown at an annualised rate of 2.3% over the past nine years, while the share price has appreciated 24% over the same period. 

Best of all, these gains and steady quarterly dividends require a fraction of the effort it would take me to assemble and manage a diverse portfolio of office and retail properties. The income from a well-picked REIT is truly passive.  

Others

Of course, British Land isn’t the only REIT I like to monitor. Others such as Land Securities and Segro offer attractive yields as well (4.67% and 2.18% respectively). I’m also watching large-scale warehousing real estate owner Tritax Big Box as a proxy for the e-commerce boom. 

There are plenty of options for investors trying to generate passive income through real estate without the hassle of being a part-time landlord.   

Foolish takeaway

Buy-to-let property is simply too much work. Instead of looking for tenants, maintaining properties, and worrying about interest rates, I’d rather accumulate a hefty position in some robust real estate funds like the ones I’ve mentioned above. For most investors, I believe this is a much better strategy for generating genuinely passive income.

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.

VisheshR has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co, Landsec, and Tritax Big Box REIT. 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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