Buy-to-let is a popular way of generating passive income to build wealth. But owning and renting a property may not be as viable as you might think. There are lots of expenses that most people don’t like to think about – including agency, maintenance, and refurbishment fees.
An alternative to buy-to-let for passive income?
What if there was a way to rent properties without any of these issues? Enter the real estate investment trust (REIT).
A REIT is traded just like a typical stock. It takes shareholder capital and uses it to buy properties and leases them to individuals or businesses. Furthermore, these businesses must return 90% of net profits to shareholders through dividends to retain their REIT status. In other words, investors get rental income as dividends without having to deal with any agencies or tenants.
Here are two of my favourites that both serve the online shopping industry.
An e-commerce warehousing solution
Warehouse REIT (LSE:WHR) operates small-to-medium-sized warehouses for businesses that typically operate online – such as Amazon and John Lewis. It acquires older properties in prime locations, spruces them up, and then rents or sells them to new tenants at premium prices – just like flipping a house.
The real-estate firm Savills predicts that each additional €1bn of online sales will require an extra 775,000 sq ft of warehouse space. If this prediction is correct, then the facilities being offered by Warehouse REIT become more essential by the day.
With dividends of 6.2p per share, shareholders are reaping a 5.4% dividend yield.
Last-mile delivery for online goods
Londonmetric Property (LSE:LMP) is nearly four times the size of Warehouse REIT and operates in a similar, but slightly different, space. Initially, the business was focused on acquiring bricks-and-mortar retail and office space. However, it has since pivoted to urban last-mile distribution centres.
These are basically small warehouses that provide temporary storage of products that are ready for delivery.
For example, when you buy an item online, it’s moved from a storage facility (provided by the likes of Warehouse REIT) to a distribution centre (provided by the likes of Londonmetric Property). A courier will then pick it up and transport it over the last few miles to your doorstep.
Just like Warehouse REIT, the stock has a dividend yield of 5.4%.
Are REITs better than buy-to-let?
In the UK the average mortgage is around £130,000 over 20 years. If I invested the same amount of capital in these two cheap UK shares equally, the annual income would be just over £7,000.
Without all the fees involved with buy-to-let, that passive income is pure profit. However, a massive advantage over buy-to-let is that I can leave this income to compound through dividend reinvestment. Assuming that dividend yield doesn’t change, after 20 years, the compound effect would generate close to £250,000 from dividends alone.
Now that’s the kind of passive income I’d like to see in my portfolio!
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Zaven Boyrazian does not own shares in WarehouseREIT or LondonMetric Property. The Motley Fool UK has recommended LondonMetric Property PLC and Warehouse 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.