UK house prices reached record levels this week. Despite this, there’s an opportunity right now for investors looking for a second income that might be too good to pass up.
With interest rates at 10-year highs and house prices reaching record levels, breaking into the buy-to-let market’s not easy. And I think there’s a better alternative.
Buy-to-let
The most obvious way of earning extra income from property is buy-to-let. This involves buying a house, finding a tenant, renting it out, and collecting the income.
There’s nothing intrinsically wrong with this, in my view. But there are two reasons why right now doesn’t look like a great time to be getting into that sector.
The first is that buying property is expensive. According to Rightmove, the average UK house price reached a record high of £375,000 this year.
The second is that interest rates are at their highest levels since 2008. So not only does buying a house take more cash than ever before, the cost of borrowing it is unusually high.
REITs
Together, the combination of record prices and high interest rates make an unattractive equation for investors. But there is another way to earn a second income from property.
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Real estate investment trusts (REITs) are companies that own and lease properties. And they distribute 90% of their income to shareholders in the form of dividends.
Property prices might be at all-time highs, but shares in REITs aren’t. The iShares UK Property UCITS ETF is about 17% lower than it was 10 years ago.
In other words, REITs are less expensive now than they were a decade ago, even though the market value of their portfolios has gone up. To me, that looks like an opportunity.
The PRS REIT
REITs can own various types of property, but one of the most straightforward is The PRS REIT (LSE:PRSR), which focuses on housing. The stock’s down 26% since its IPO in 2017.
In terms of demand, the long-term picture looks pretty good for rental housing in the UK. The undersupply of residential properties should allow the company to maintain high occupancy levels.
Nonetheless, there are risks. One is the possibility of a change in government regulation, another is the company’s debt, and a third is the prospect of slow rental growth.
All of these are genuine risks, but the buy-to-let market has similar issues. That’s why REITs in general – and PRS REIT in particular – look a much better income opportunity.
Good value
The equation for investors is simple. To recap, UK property prices are at their highest levels in history and this makes the buy-to-let market expensive, but REITs are lower than they were 10 years ago. This is because their debt is also more expensive than it was a decade ago.
But I think REITs are still terrific value. If I were looking for a second income, I’d aim to just collect a steam of dividends and be done with it.
This post was originally published on Motley Fool
