The Motley Fool

Why I’m looking at high-yielding REIT investing instead of a mortgage calculator for a buy-to-let

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Landsec. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.