Obtaining a relatively high return on their investments could enable many investors to retire early. Today I am going to discuss how investors interested in property could easily buy top real estate investment trusts (REITs) to generate truly passive income.
Buy-to-let investing — not for everyone
Investors looking for passive income have traditionally considered investing in buy-to-let as a top choice.
However, becoming a landlord can also turn into a full-time job when one has to mortgage, buy and manage several properties, collect rent, and deal with estate agents as well as tenants.
Furthermore, since 2015, there have been several changes to the way that landlords are taxed in the UK, making it more complicated to become a landlord. There are likely to be even more tax changes being planned too.
But there could be another option for the average investor who may not have the time or the capital to build or maintain a real estate portfolio.
Why I’d invest in REITs
As a company that owns, operates or finances income-producing real estate, a REIT may offer exposure to retail, residential, office or industrial properties. By law, REITs must pay out 90% of their rental income to investors.
Therefore buying shares in them could be a great way to invest in real estate. REITs are also highly liquid assets as investors can trade the shares on the stock market swiftly; they generally offer higher income returns than cash; and they also have the potential to deliver capital growth.
If you own REIT shares, your fortunes will be tied to the ebb and flow of the property market, which has been one of the sectors suffering since the 2016 Brexit vote. But let us look past Brexit uncertainty to see if there is a REIT with a prime commercial property portfolio that is trading at a discount to book value.
One REIT I’m watching closely
Landsec (LSE: LAND), one of largest listed property developers in the UK, is a favourite among REIT investors. The group, which is behind London’s high-profile ‘Walkie Talkie’ at 20 Fenchurch Street, holds a portfolio of prime London property. It also owns shopping centres including Westgate Oxford, a joint venture with the Crown Estate, and a stake in the Bluewater mall in Kent.
Its current dividend yield of 5.9% offers a bigger passive income than investing directly in properties in major cities nationwide.
Let’s assume, starting in September, you invest £250 a month regularly into Landsec and that the group pays 5% in annual dividends.
Regardless of any potential capital gains on the investment, at the end of year one (i.e., after making 12 monthly investments), your total investment of £3,000 will bring in a dividend income of £150. Of course, LAND’s price may go down during the year, but your dividends will be paid into your brokerage account regardless.
Then if you also allow the dividends to be reinvested and the interest to be compounded annually, by the time you are ready to retire, your initial investment will likely become an important part of your retirement income.
The group’s price-to-book (P/B) ratio of 0.56 also appeals to value investors, with a number under 1.0 indicating a potentially undervalued stock. If you are ready to take a long-term view on the UK commercial property sector, now may be an opportune time to buy into the shares.
