Buy-to-let has become increasingly problematic for smaller ‘hobby’ landlords. Voids and unexpected costs have always been a drag on rental income and can have a disproportionate impact on those with only one or two properties — as this horror story from my Foolish colleague Alan Oscroft demonstrates.
However, more recently, tax changes and the introduction of stricter lending criteria have provided further reasons for many buy-to-let landlords and aspiring landlords to wring their hands in frustration. The result? Figures from Shawbrook Bank show the proportion of buy-to-let mortgages completed by individual landlords has fallen from 68% in the first half of 2015 to 34% in the first half of 2018. Meanwhile, over the same period, the proportion completed by limited companies has doubled from 32% to 64%.
The sector remains attractive for those operators with scale and professionalism, but how can the rest of us profit? Well, there’s a dead easy way. We can buy shares in two real estate investment trusts that listed on the stock market last year: Residential Secure Income (LSE: RESI) and PRS REIT (LSE: PRSR). Once fully invested, the former is targeting a dividend yield of 5% a year and the latter a yield of at least 6%. Thereafter, both companies expect to increase their annual dividends broadly in line with inflation.
On offer right now
Residential Secure Income raised £300m in its initial public offering (IPO) and a further £250m early this year. It focuses mainly on retirement housing, and shared ownership housing, as well as leasing housing to local authorities for the vulnerable.
PRS REIT raised £250m in its IPO. Its focus is on newly-built rental homes, mainly for families, in areas near key centres of employment, with convenient access to transport infrastructure, and close to good primary schools.
I believe it’s worth buying both stocks, because together they provide good diversification across various residential housing sub-sectors. Furthermore, I believe they’re worth buying right now. This is because those target yields I mentioned earlier are based on their IPO share prices of 100p. Both stocks are currently below that level, meaning investors today are locking in higher initial yields than the targeted 5% and 6%.
The beauty of the stock market is that you can diversify the sources of your income beyond residential housing. You could invest in a big, commercial property player like British Land, giving you exposure to offices and shops. This stock currently offers a prospective dividend yield of 5.6%. In addition, there are numerous companies specialising in niche sub-sectors of the property rental market. For example, Primary Health Properties concentrates exclusively on modern primary health facilities in the UK and Ireland. This stock currently offers a prospective dividend yield of 5%.
Furthermore, there’s no need to stick to property companies. Indeed, I would highly recommend diversifying across a range of industries and sectors. Right now, there are plenty of yields in excess of 5% available. Vodafone, Shell, HSBC, GlaxosmithKline, British American Tobacco, and United Utilities to name but a few.
Of course, dividends are not guaranteed. Sometimes a company may suspend or reduce its dividend for one reason or another. However, holding a diversified portfolio of stocks reduces the impact of any individual company cutting its payout. As such, diversification is the way I’d go.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended British Land Co, HSBC Holdings, and Primary Health Properties. 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.