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Buy-to-let investors have been clobbered by higher interest rates more recently. But as the Bank of England reduces lending rates, individuals may be considering rotating out of other assets like UK stocks to get into the residential rentals market.
Owning buy-to-let property gives investors a regular passive income, along with a way to exploit long-term house price growth. Yet there are also significant drawbacks, including high upfront costs, adverse tax changes, ongoing repair costs, and potential tenant problems.
There’s also the problem of ever-growing sector regulation. Just this week, the government unveiled new energy efficiency targets for landlords that could, on average, add between £6,100 and £6,800 to their costs by 2030.
Two top UK shares
I think a better way to consider tapping the residential rentals market is by buying UK stocks. Grainger (LSE:GRI) and The PRS REIT (LSE:PRSR) are a couple that allow individuals to profit from soaring tenant rents in a potentially simpler and more cost-effective way.
Grainger is the UK’s largest residential landlord currently listed on the London Stock Exchange. Its portfolio is worth a whopping £3.4bn and comprises some 11,100 homes.
PRS REIT is no small player, either. It had 5,437 properties on its books as of December.
Thanks to their strong balance sheets, both firms are expanding to capitalise on the lucrative trading environment too. Grainger’s £1.4bn development pipeline comprises a gigantic 5,000 homes.
Pros and cons
Both companies face the same problems of increased regulatory loopholes and associated costs. But they also enjoy significant economies of scale that private landlords don’t, which in turn limits the impact of such expenses on profits.
Other advantages these shares offer over buy-to-let include:
- Lower upfront investment costs for investors.
- No property management responsibilities.
- Superior risk mitigation through a diversfied portfolio of thousands of properties.
- UK shares can be sold more quickly and cost effectively than bricks-and-mortar assets.
One downside is that shareholders in these companies don’t have control over which properties to hold. Another is that they have some discretion over the levels of passive income they pay out.
Yet on balance, I believe the advantages they offer to investors outweigh the cons.
And in the case of PRS REIT, it only has limited control over dividend decisions. This is thanks to real estate investment trust (REIT) rules, which specify that at least 90% of rental income must be paid out each year.
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.
Tonnes of choice
Another reason why I like the idea of UK stocks over buy-to-let is the range of options they provide. In other words, investors don’t just have to limit themselves to residential rentals and can seek large returns elsewhere.
It’s something I myself have sought to take advantage of. Primary Healthcare Properties and Tritax Big Box — companies which invest in medical and logistics facilities, respectively — are two I currently hold in my Stocks and Shares ISA.
In total, there are more than 50 REITs listed on the London Stock Exchange. I think potential buy-to-let landlords should give them a close look before investing any cash.
