£20,000 in savings? Here's how I can guide you to a great second income from the UK property market

Historically, real estate investing has been a great way to make a solid and sustainable second income. Buy-to-let was very popular with those looking to invest their money.

Rental contracts meant they could expect a reliable income, even during a recession. And rising property prices meant that buy-to-let investors booked jaw-dropping profits when they eventually sold.

But conditions have become more difficult for private landlords over the past decade. So don't forget buy-to-let. Here, I will reveal what I think are the best ways to make money in the UK property market.

A fading appeal

But before I do, let's take a quick look at why buy-to-hold is holding the British people back.

The Rental Fees Act 2019 introduced measures such as transferring certain costs from tenants to landlords, as well as security deposits. Restrictions on mortgage interest and higher stamp duty on second properties have also had an impact.

Property owners have faced higher mortgage costs since the Bank of England started raising interest rates.

The effect of all this has been great. According to price comparison website, Finder, the average landlord in April made £4,000 less a year in profit than in 2020, despite monthly costs rising steadily.

Better procurement?

It's still possible to make money as a landlord, but I'd rather find other ways to make money in brick and mortar.

Fortunately, UK share investors have what I consider to be an excellent alternative to buy-to-let. Real estate investment trusts (REITs) are companies that invest in a portfolio of properties in one or more sectors.

We are talking about hospitals, shopping centers, offices, factories and hotels, for example. This gives investors more choice, and allows them to spread risk across many different areas.

Investors also don't have to pay large upfront fees to get involved with REITs. And under industry regulations, these companies must pay out at least 90% of annual rental income in the form of dividends.

Buy-to-let has some advantages over REIT. An investor has direct control over which assets to buy or sell. And while REIT prices can fluctuate, buy-to-let property prices tend to be more stable.

But on balance, I think investment trusts would be a better choice for me.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice.

The highest number of REITs

Grainger (LSE:GRI) – trading at 240p per share – is another stock I'd buy if I had the cash to invest. With 11,153 residential properties on its books, it can still pay a decent amount to its investors even if some of its tenants default on rent.

In fact, shares here have risen almost every year for the past 10 years, thanks to those rapidly growing rental properties mentioned earlier. And City analysts expect them to continue to rise over the next few years, taking yields from 3.1% this year to 3.5% and 3.9% in 2025 and 2026 respectively.

A £20,000 investment in Grainger shares today would give me a dividend of £620 this year alone. And I think they can provide me with a growing income in the long run, given the positive outlook for the UK rental sector.

Possible changes in the rental law could have an impact on the return of investors further. But, on balance, I think investing in Grainger is worth serious consideration for investors looking for a second income.