How to create a second income from UK property without purchasing a buy-to-let

Property investments can be a great way to generate a second income. With this asset class, tenants pay rent, which translates to cashflow for owners.

Now, when most people think of property investments, they think of buy-to-let. But there are other ways to invest in UK property, and the good news is that you can get started with just a few hundred pounds (unlike with buy-to-let).

An easier way to invest in property

One really easy way to invest in property – and potentially build a second income – is via real estate investment trusts (REITs). These are companies that invest in different types of real estate (offices, hospitals, shopping centres, storage, etc).

These property investments are listed on the stock market meaning that they trade like regular stocks. So compared to buying a buy-to-let property, it’s far more straightforward to invest – all you need to get started is a brokerage account with the likes of Hargraves Lansdown or Trading 212.

From an investment perspective, REITs have several advantages. One is that they typically pay big dividends as they’re required to pass on a large chunk of their income to investors.

Another is that you can hold them in a Stocks and Shares ISA, meaning all income can be tax-free (note that buy-to-let investors face a ton of taxes today).

Additionally, you can start investing with a small amount of capital. Only have £1,000 to invest? That’s more than enough to get started in this area of the property world.

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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A £1 REIT with lots of potential

An example of a REIT is the Target Healthcare REIT (LSE: THRL). It owns a range of care homes across the UK.

I think it looks interesting from an investment perspective as in the UK, the number of people aged over 85 is projected to increase significantly over the next two decades. So the company should benefit from some powerful demographic tailwinds.

In terms of income, analysts expect the REIT to pay out 6.01p per share for this financial year (ending 30 June 2026). Given that it’s currently trading for around £1, that translates to a yield of about 6%.

In other words, invest £5,000 and you could be looking at income of £300 a year. This could be tax-free if the REIT was held inside a Stocks and Shares ISA.

Now, a risk with this REIT – and all others – is interest rates. If they were to move higher from here, the company’s profits could take a hit, meaning less income for investors (note that the share price took a hit when rates climbed in 2022).

All things considered however, I think it has potential and is worth considering as a long-term property investment. Other REITs that could be worth a look include Tritax Big Box, which is focused on e-commerce storage, and Primary Health Properties, which owns a range of healthcare facilities across the UK.

The post How to create a second income from UK property without purchasing a buy-to-let appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Primary Health Properties Plc and Tritax Big Box 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.