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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »