Investing in real estate is a proven and powerful strategy for earning a second income. After all, with tenants paying rent every month, it generates a recurring and predictable source of income. This is one of the main reasons why buy-to-let has become so popular in Britain.

Unfortunately, not everyone has the money to buy rental properties, especially now that mortgage rates are rising. Fortunately, there is another way – one that doesn't require going into debt.

In fact, with just £5,000, investors can start earning impressive passive income, overnight. Here's how.

Real estate income generation

The easiest way to invest in real estate in 2025 is through a real estate investment trust (REIT). This particular type of business owns, manages and leases a portfolio of properties, collecting rent which is then paid to shareholders, usually quarterly.

REITs come with a lot of advantages. Since they trade like any other stock, investors can put money in and take out money almost instantly.

Meanwhile, someone with just a few thousand, or even a few hundred pounds, can snap up some stocks and start generating passive income from dividends. In many cases, the returns offered by REITs are much higher compared to standard dividends for London-listed stocks.

Best of all, it can be held within a stocks and shares ISA, allowing all that income to be tax-free – a huge advantage that a traditional buy-to-let doesn't have.

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

A FTSE 100 REIT with lots of potential

The UK's leading index is filled with many REIT stocks. And the thing I've already added to my income portfolio is… London Metric Property (London Stock Exchange: LMP).

After a series of acquisitions, the company became one of the largest publicly listed business owners. This expansion eventually led to the collection being included in the collection FTSE 100 index Earlier this year. Its diversified portfolio includes a range of logistics centres, retail complexes, gas stations, and even healthcare centres, among others.

Smartly, most of its properties are rented under a triple net lease structure. This means that tenants are ultimately responsible for maintenance, insurance and taxes. LondonMetric therefore benefits from lower operating costs and more predictable cash flows.

In fact, this is how the REIT delivered a decade of continuous dividend increases, generating negative inflation-linked income for shareholders.

Risk versus reward

Although I remain very bullish on this business, it is undeniable that there are critical risk factors that investors should carefully consider.

With the bulk of net profits paid to shareholders, LondonMetric relies heavily on external financing. As such, the balance sheet is highly leveraged, making the group highly sensitive to interest rates. This exposure is only amplified by the impact of interest rates on property valuations as well.

So far, the company is generating more than enough cash flow to cover debt servicing costs and shareholder payments. However, with multiple lease renewals on the horizon, cash flows could be negatively impacted if rents are negotiated by anchor tenants.

This risk is why the stock currently offers an impressive 6.7% yield. However, for me, the risk is worth the reward.