Having some exposure to property is often recommended for those looking to build a suitably diversified portfolio. The idea is that bricks and mortar will pick up the slack when other assets aren’t doing so well.
Of course, many people will simply consider this element of their wealth to be covered by the house they live in, which they will own outright once the mortgage is wiped. Others will want to take things further.
Today, I’m looking at a relatively fuss-free way of making extra cash from property. Before doing so, however, it’s worth mentioning why this solution isn’t buy-to-let.
Whole lotta hassle
There are, of course, attractions to becoming a landlord. Rent received will cover (or go some way towards covering) the mortgage payments on the property that’s being let.
The fact that house prices gradually rise over time, albeit through a few inevitable market wobbles, also means the owner could/should benefit handsomely when they come to sell. Aside from this, tangible assets like an extra house or flat give some people peace of mind compared to numbers on a screen.
That said, the idea that becoming a landlord as an easy route to riches is most definitely flawed. As well as ongoing maintenance, tax considerations and legal hoops-a-plenty, those wanting to let a property need to be prepared for periods in which they may struggle to find a tenant. Owners must also have to contend with troublesome renters who don’t treat the flat or house with quite as much care as they would like.
Should the life of a landlord not be what you expected, it’s worth remembering that selling any property can also take a lot longer than you think.
So, what’s the alternative?
Here at the Fool UK, we think there’s a far less stressful way of getting exposure to this asset class beyond your own home. Real Estate Investment Trusts (REITs) are quoted companies that own and manage all sorts of commercial and residential property. Through buying into these companies, investors get a massive slice (usually a minimum of 90%) of the trust’s rental income.
Unlike the underlying properties, REITs are also liquid in that you can buy and sell them just like ordinary shares. A further benefit is that they allow investors to focus on niche areas of the market.
If you think the demand for warehouses from companies like Amazon will continue growing, for example, then Tritax Big Box — which rents out such spaces — may be worth investigating further. It’s set to generate a yield of 4.8% for investors this year, based on the current share price.
If you suspect our tendency to hoard stuff isn’t going to disappear anytime soon, self-storage players Big Yellow or Safestore — yielding 2.8% and 2.2% respectively — could also be ideal additions to your portfolio.
For those who prefer the passive approach, US giant iShares offers the UK Property UCITS ETF. For an ongoing charge of 0.4%, you can track the performance of an index composed purely of REITS and UK-listed real estate companies, the yield from which is currently 3.3%.
Although nothing can be guaranteed — REITs have a tendency to be volatile during housing/general market downturns — these options should, in my opinion, be far more appealing to busy private investors.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT. 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.