With £100,000, an investor could look to property as a way of earning a second income. This can be a good idea, but there’s more than one way of doing this – and some are better than others.
One strategy involves buying a property – with or without a mortgage – finding a tenant, and looking after the maintenance. But I think there’s a more attractive way of going about it.
Property investing
Real estate investment trusts (REITs) are companies that own and lease properties. In exchange for tax advantages, they distribute 90% of their rental income to shareholders as dividends.
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.
Investors can buy shares in a number of REITs via the stock market. They’re publicly traded and – unlike buying a house – it’s possible to get started without saving up a big cash deposit.
The obvious advantage of REITs over buy-to-let properties is investors don’t have to do anything. No finding tenants, dealing with repairs, or working out contracts. The income is genuinely passive.
On top of this, the potential returns might actually be greater. As an example, shares in Supermarket Income REIT (LSE:SUPR) currently come with a dividend yield of 7.45%.
Supermarkets
Supermarket Income REIT owns a portfolio of 82 retail properties. And there are some obvious reasons why this might be attractive to investors looking for a second income.
One point is that it provides exposure to a sector that’s hard to get access to in other ways. Buying a supermarket building with £100,000 isn’t easy for most people.
It also allows investors to diversify across several properties, rather than just one. With £100,000, it’s possible to invest in a number of different REITs across industries and geographies.
On top of this, the vast majority of Supermarket Income REIT’s tenancy contracts are linked to the Retail Price Index. So that 7.45% return should be pretty well protected from inflation.
Interest rates
For people buying houses, there are two potential challenges.
The first is the possibility of having higher costs when the time comes to renew their mortgage, because of higher interest rates, and the second is the value of their property falling. Both of these risks also apply in the REIT sector.
Supermarket Income REIT has over £700m in debt, which investors need to take note of. If interest rates move higher, this could create a problem for the firm in terms of maintaining its dividends.
That’s something to pay attention to as the company’s existing loans reach maturity. But in the short term, this looks unlikely – the Bank of England is indicating that rates are more likely to fall than rise.
Are UK REITs attractive?
The UK property sector has attracted a lot of attention recently. Low valuations and high returns have meant Assura, Care REIT, and Warehouse REIT have all been the subject of takeover offers.
While this has been going on, the retail sector has gone relatively unnoticed. As a result, investors might consider Supermarket Income REIT as an unusually good second income opportunity.
