How to turn £100,000 into an instant £7,450 second income

With £100,000, an investor could look to property as a way of earning a second income. This can be a good idea, but there’s more than one way of doing this – and some are better than others.

One strategy involves buying a property – with or without a mortgage – finding a tenant, and looking after the maintenance. But I think there’s a more attractive way of going about it.

Property investing

Real estate investment trusts (REITs) are companies that own and lease properties. In exchange for tax advantages, they distribute 90% of their rental income to shareholders as dividends.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Investors can buy shares in a number of REITs via the stock market. They’re publicly traded and – unlike buying a house – it’s possible to get started without saving up a big cash deposit.

The obvious advantage of REITs over buy-to-let properties is investors don’t have to do anything. No finding tenants, dealing with repairs, or working out contracts. The income is genuinely passive.

On top of this, the potential returns might actually be greater. As an example, shares in Supermarket Income REIT (LSE:SUPR) currently come with a dividend yield of 7.45%.

Supermarkets

Supermarket Income REIT owns a portfolio of 82 retail properties. And there are some obvious reasons why this might be attractive to investors looking for a second income.

One point is that it provides exposure to a sector that’s hard to get access to in other ways. Buying a supermarket building with £100,000 isn’t easy for most people.

It also allows investors to diversify across several properties, rather than just one. With £100,000, it’s possible to invest in a number of different REITs across industries and geographies.

On top of this, the vast majority of Supermarket Income REIT’s tenancy contracts are linked to the Retail Price Index. So that 7.45% return should be pretty well protected from inflation.

Interest rates

For people buying houses, there are two potential challenges.

The first is the possibility of having higher costs when the time comes to renew their mortgage, because of higher interest rates, and the second is the value of their property falling. Both of these risks also apply in the REIT sector.

Supermarket Income REIT has over £700m in debt, which investors need to take note of. If interest rates move higher, this could create a problem for the firm in terms of maintaining its dividends.

That’s something to pay attention to as the company’s existing loans reach maturity. But in the short term, this looks unlikely – the Bank of England is indicating that rates are more likely to fall than rise.

Are UK REITs attractive?

The UK property sector has attracted a lot of attention recently. Low valuations and high returns have meant Assura, Care REIT, and Warehouse REIT have all been the subject of takeover offers.

While this has been going on, the retail sector has gone relatively unnoticed. As a result, investors might consider Supermarket Income REIT as an unusually good second income opportunity.

The post How to turn £100,000 into an instant £7,450 second income appeared first on The Motley Fool UK.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More reading

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Warehouse REIT Plc. 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.