Buy-to-let’s historically been a great way to make a second income from Britain’s property market. But its popularity has waned in recent years. Simply, it’s become more and more difficult to turn a decent profit.
Higher stamp duty, lost tax relief on mortgage interest, and heftier administration fees are all eating into landlord earnings. Larger home loan costs after the Bank of England hiked lending rates have also had an impact.
On the plus side, interest rates are tipped to fall steadily over the next year as inflation falls. But I still believe there are better ways for property investors to source a passive income.
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If I had £20k to invest, here’s how I’d do it.
The landlord
Grainger‘s (LSE:GRI) the largest listed residential landlord in the country. It has more than 11,000 homes in its portfolio, and another 5,000-plus at various stages of development.
This is a much better way to play the residential property market, in my opinion. It’s much more cost effective than buy-to-let, and individuals don’t have to worry about the huge up-front costs of buying a second home.
What’s more, Grainger’s large-and-growing property portfolio helps investors to spread risk. Returns aren’t hammered if one or two tenants don’t pay the rent, or properties are unoccupied.
In fact, rents at the FTSE 250 company remain extremely low and almost all its homes tenanted. Occupancy stood at an impressive 97.7% as of March.
On the other hand, buy-to-let provides people with more control over their investment. I can choose which property/properties to buy, who to rent to, and how much to raise rents by, for instance. Grainger also faces the problem of rising costs.
But, on balance, I think Grainger brings more benefits than drawbacks to investors. And with a forward price-to-earnings growth (PEG) ratio of 0.7, it looks dirt cheap.
The ETF
iShares UK Property UCITS ETF‘s (LSE:IUKP) an exchange-traded fund (ETF) that invests in a wide range of property companies. Today, it owns shares in 40 different real estate businesses.
As a consequence, this financial instrument also offers excellent diversification across a huge selection of properties. In fact, it offers a big advantage over buy-to-let in that it has exposure to many different property sectors, not just residential rentals.
This also provides the company with added growth potential in places that I wouldn’t have the financial clout to invest in by myself. Major holdings here include warehouse specialist Segro, student accommodation provider Unite, and retail and office space owner Land Securities.
One final advantage is that the fund invests primarily in real estate investment trusts (REITs), which in turn can make it an effective buy for regular dividends. These businesses must pay out at least 90% of earnings from their rental operations in the form of dividends.
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One concern I have is the fund’s exposure to cyclical sectors like retail and leisure. This can affect returns during economic downturns. But, like Grainger, I think that overall this is an attractive way to make money from UK property.
