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Owning a property and renting it out can be a great way to generate a second income. But it can be a challenging business.
Buying rental properties requires significant amounts of cash and/or debt. It also involves work in the form of finding a tenant, maintaining the property, and arranging contracts.
However, there is a way around all of this that I think is much more attractive. Instead of buying a property to rent it out, an investor can buy shares in a publicly traded real estate investment trust (REIT).
By investing in a REIT, you could outsource all the work to someone else. And you don’t need a big outlay – investors can start earning passive income today with as little as £1.
REITs
First things first: what are REITs? The basic idea is that a REIT is an organization that owns a portfolio of properties and makes money by renting them out.
These can be any type of properties: homes, offices, warehouses and more. Different REITs own different types of property.
However, they all have a few things in common. They all have most of their assets in real estate and make most of their money from these assets.
Importantly, to qualify as a REIT, an organization must distribute at least 90% of its taxable income to its shareholders. I think this makes them great passive income investments.
I believe investing in a REIT is one of the best ways to earn passive income through ownership. It is much easier than buying a property to rent.
Not having the work associated with a buy-to-let frees up an investor to use their time to earn money in other ways. They can then use the money they earn to increase their investment and grow their passive income.
risks
Like all investments, REITs carry risks. There are things investors should consider before jumping into one.
The main thing to consider is the likelihood that a business will not be able to collect your full rent each month. This can happen for one of two reasons.
First, tenants may not be able to pay their rent. This is much more likely to be the case when the tenant’s business is under pressure or has a low credit rating.
To hedge against this risk, it’s important to focus on REITs that have high-quality occupants in their buildings. Real Estate Income is a good example of this.
Second, the landlord may not even be able to find a tenant. This can be especially risky where the buildings have specific uses, such as hospitals.
In my view, the best way to avoid this is to focus properties in desirable locations. With its portfolio of commercial premises in densely populated areas, Investment in Federal Real Estate it does this very well.
invest in real estate
In general, I think REITs are the best way to earn a second income when investing in property. Investing in them has some significant advantages over buy-to-let.
Not needing large amounts of capital to start is one. And being able to outsource work to someone else is another.
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