Investing in property can be both rewarding and profitable. But, like all investments, it carries risks.
This article will explore the range of options available for real estate investment, from obtaining the finance to where the most profitable opportunities lie.
How do you Start Investing in Real Estate?
The common ways of investing in property are:
- Buying property for rental or resale
- Real-Estate Investment Trusts (REITS)
- Property Bonds or Property Loan Notes
Below, we’ll explain the advantages and disadvantages of these differing opportunities.
Should You Invest in a Buy to Let Property?
Property remains a relatively safe long term investment, still very likely to increase over the long term.
If you find the right property, and can secure the right mortgage, it remains a viable proposition, although regulatory and tax changes in the UK reduced investment in this sector by 80% between 2015 and 2017.
While there are still opportunities in areas with low property prices and a strong demand for rentals, investing in Buy To Lets is no longer the golden opportunity it once was.
- Make a healthy return on investment over time
- Generate an income large enough to cover mortgage repayments
- Associated costs can be offset against tax
- Costs can creep up if the property is empty or not rented
- Stamp Duty on Buy to Let properties can be expensive
- The UK government is increasing the tax burden on Buy to Let property landlords as a way of freeing up the market for first time buyers
- You will need to find tenants, and maintain the property
What Kind of Returns Can You Get When Investing in a Buy to Let Property?
The ideal Buy to Let investments will have a rental yield of around 8-10%, with decent capital growth and tenant demand.
What are Real Estate Investment Trusts (REITS) ?
Introduced to the UK in 2007, REITS are property investment companies listed on a recognised stock exchange (outside of the UK, private REITS may not be listed on an exchange).
They work in a very similar fashion to mutual funds, with the principle difference being the fund invests in property instead of stocks.
As a means of facilitating investment in the UK property sector, REITS are exempt from tax on the income and gains of its property rental business.
For investors, they offer potentially lucrative opportunities to share in the income from commercial real estate ventures.
Essentially, the money from investors is pooled and invested. The REITS income is then distributed to shareholders in the form of dividends.
When investing in REITS you can either invest directly in the companies themselves or in ETF’s. Exchange Traded Funds generally invest in 15 or more of these securities, giving investors access to a basket of REIT stocks.
- Competitive long-term rates of return
- Higher dividends, on average, than other equities
- Useful means of portfolio diversification
- Potential for long-term share price appreciation
- Non-Traded REITs mean you can’t research your investment, and could get locked in for 7 years. (NB, there are no non-traded UK REITS)
- Rising Interest Rates generally impact negatively on REIT’s performance
- Choice of REITS is essential. (For example, if a REIT is heavily invested in high street property, it would be currently struggling)
- REIT dividends are taxed as ordinary income.
- Like any publicly traded stock, REITS are subject to market fluctuation
- Property price fluctuation and demand places any REIT at some liquidity risk
What Kind of Returns Can You Get When Investing in REITS?
Average annual returns from REITS stands at 11% or slightly higher.
Investing in Property Bonds or Loan Notes
Another popular investment strategy in the property market comes via property bonds or loan notes.
In order for commercial developers to raise capital, they will often sell bonds – money from investors in the form of a loan – to get their projects off the ground.
The investor gets a fixed rate annual interest, as well as security over the property they’re helping to get off the ground.
The main risks here surround the credibility of the company offering the bond, and the viability of the project you would be helping to fund. Should the development company become insolvent, you may be at risk of losing your capital.
Assuming the companies finances are sound, property bonds can represent a way of benefiting from large scale property development projects, delivering returns of up to 12%, plus bonuses.
This area is something only ‘sophisticated investors’ should consider, since there are risks. As part of a portfolio, however, property loan notes can offer some of the highest returns currently available.
- High fixed rates of interest
- Flexible 1-5 year terms
- Developer loan notes come with a right to possess (known as a lien), meaning you can make a claim against the property itself in case of default
- Any loan note opportunity hangs or falls on the credibility of the developer. You need to ensure they have a good track record of delivery
- Not everyone will be eligible to invest in them
How Much Money do you Need to Invest in Property?
Of the three options we’ve shortlisted, investing in REITS comes with the lowest entry point. Anyone with a share dealing account can invest with either a SIPP or a self-select ISA on the main market. The minimum entry point might be just one share of stock.
Investing in property loan notes comes with a slightly higher bar, usually starting at £10,000.