£10,000 to invest? Here’s how I’d aim to turn that into a £1,013 second income within 10 years

UK property valuations are rising while REITs are seeing their share prices struggle. Stephen Wright sees an opportunity to give his second income a boost.

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Investing in property can be a great way of earning a second income. And I think there’s a glaring opportunity in the UK stock market at the moment. 

House prices in the UK are hitting record highs again. But shares in companies that make money by owning and leasing them aren’t – I think this is something investors should take note of.

House prices

Interest rate increases caused house prices to drop. And shares in real estate investment trusts (REITs) that make their money by leasing properties also fell as the value of their assets declined.

The property market didn’t stay down for long, though. A combination of longer mortgage terms and a reduction in construction output caused prices to recover quickly.

Last month, the average house price reached £375,000 – a new record. But REITs haven’t seen a similar recovery and this is where I think there’s a real opportunity for investors. 

There are a couple of REITs that stand out to me at the moment as particularly attractive. And if I were looking to invest £10,000 to generate a second income, this is what I’d be buying.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Primary Health Properties

Primary Health Properties (LSE:PHP) is a FTSE 250 REIT that leases a portfolio of GP surgeries. At today’s prices, the stock comes with a 6.5% dividend yield

The high yield probably reflects the fact the company has a lot of debt, which is a risk. If it can’t refinance its loans, the company will have to issue equity to remain solvent.

This can’t be ruled out, but I think the dividend per share would still be attractive even if this happens. And there’s a lot to like about Primary Health Properties if things go even reasonably well. 

Competition is limited and the company’s portfolio is fully occupied, with over half of its rent coming from the UK government. I think it’s well worth the risk at today’s prices. 

The PRS REIT 

The PRS REIT (LSE:PRSR) is another UK REIT that comes with an attractive 5% dividend yield. The business is much more straightforward – it buys houses from developers and leases them to families. 

A shortage of rental accomodation in the UK helps boost demand for the company’s properties. And a rising property market allows it to borrow at more attractive rates to support its growth. 

In an election year, it’s extremely unwise to discount the political risk associated with a company like The PRS REIT. Standards for rental accommodation could change, generating expensive upgrades. 

At the moment, though, the firm is in good shape. Its properties are all above the current required standards and I think the firm can keep generating income for shareholders for some time.

£1,000 in 10 years

With £10,000 to invest, I could divide it between the two REITs on my radar. Investing two-thirds in Primary Health Properties and the balance in The PRS REIT would mean an average yield of 6%. 

Compounding a £10,000 investment at 6% per year would result in £1,013 in passive income in the tenth year. That’s what I’d do to take advantage of what looks to me like a great opportunity.

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 Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties Plc. 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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