With taxes on buy-to-let continuing to rise, real estate investment trusts (REITs) are becoming an increasingly attractive way to invest in property. After all, when these shares are held inside an ISA, rental dividends from investment properties can be enjoyed entirely tax-free. And with enough invested, individuals can potentially earn enough passive income to quit their job.
But how much money does it actually take to turn this dream into reality?
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.
Setting targets
One of the biggest attractions of REITs is their higher dividend yield, with many offering 6% or more. But the amount of money needed to replace an entire paycheque depends on the size of the salary.
So let’s say an investor is currently earning £45,000 a year. Assuming a REIT portfolio generates a 6% yield, that means a total of £750,000 is needed.
But given enough time, drip feeding a small lump sum each month into a custom portfolio that generates a 10% annualised return can steadily build to this threshold.
| Monthly Contribution | Time to reach £750k |
| £500 | 26.5 Years |
| £750 | 22.5 Years |
| £1,000 | 20 Years |
| £1,250 | 18 Years |
| £1,500 | 16.5 Years |
Picking Winning REITs
Growing a three-quarters-of-a-million-pound nest egg is only the first step of the journey. The second is finding REITs worth investing in. After all, just because a yield’s high doesn’t automatically make a dividend stock a good investment. And there are plenty of examples where promising REITs end up collapsing.
Don’t forget, these businesses are highly reliant on debt financing to expand. And consequently, it makes them extremely sensitive to changes in interest rates. That’s why it’s essential to carefully investigate a firm’s asset portfolio, cash flow quality, and balance sheet health before investing any money.
So is there a REIT that meets all these requirements? In my opinion, investors may want to consider taking a closer look at LondonMetric Property (LSE:LMP) and its 6.2% yield.
A proven commercial landlord
LondonMetric owns a diversified real estate portfolio covering multiple commercial sectors, including logistics, hotels, theme parks, convenience stores, and healthcare facilities. But by dealing almost exclusively with large-scale enterprise tenants, the firm enjoys rock-solid and predictable cash flows.
As per its latest results, rent collection stands at 99.5%, occupancy sits nicely at 98.1%, and the average duration of its ongoing leases is a staggering 16.4 years.
The result is exceptional income visibility, enabling leadership to manage both debt and dividends highly efficiently. And it’s one of the main reasons why shareholder payouts have increased every year for the last decade.
Of course, the REIT isn’t without its risks. Over half of its rental income stems from e-commerce logistics. But with other commercial landlords expanding their capacity while online retailers optimise their warehousing operations, supply might be starting to outpace demand, lowering the group’s negotiating power when leases are up for renewal.
At the same time, despite having a diversified portfolio of properties, LondonMetric is still dependent on a number of key tenants, including Amazon, Whitbread, and Marks & Spencer, among others. And this dependency only further amplifies the occupier’s negotiating power for lease renewals.
Nevertheless, with a stellar track record, impressive yield, and solid fundamentals, I’ve already added LondonMetric to my income portfolio. And it’s not the only REIT I’ve got my eye on right now.
