How to earn a second income by investing in property

Stephen Wright thinks that real estate investment trusts (REITs) could provide him with a great second income by renting property without the work.

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.

Typical street lined with terraced houses and parked cars

Image source: Getty Images

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.

Key Points

  • REITs make money by renting property and distribute their earnings to investors
  • Owning shares in a REIT allows an investor to receive passive income through property
  • Investing in a REIT doesn't take a huge amount of capital

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.

REITs

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.

Risks

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.

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.

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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

1 delicious penny stock I reckon can deliver juicy returns and growth

This food delivery penny stock has experienced a surge in performance and uptake recently. Our writer is excited by its…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares the day Tufan Erginbilgiç joined here’s what I’d have now

Harvey Jones is startled by just how fast the Rolls-Royce share price has risen since its transformative CEO took over.…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he'd bought more of them. So he's…

Read more »

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »