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
- Peer to Peer Lending
- Property ISAS
Below, we’ll explain the advantages and disadvantages of these differing opportunities.
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Is it Good to Invest in Property?
In contrast some some European countries, it remains a common ambition for most people in the UK to invest in owning their own home. The unparalleled rise in house prices over the last few decades has also led to people making a lot of money off property, reinforcing the sense that it’s a foolproof way to make excellent returns.
While in the long term, investing in property is still a solid choice, it is now much harder to make money quickly – by a quick refurbishment project, for example.
That said, the UK retains Europe’s leading commercial property investment market, pipping Germany to the post as the favourite destination for property investors.
In conclusion, property still represents one of the best investments out there, with the caveat being that doing it via your own buy to let, or refurbishment project, is now much more difficult due to regulatory changes. Alternative property investments such as peer to peer, REITS, or loan notes offer a better opportunity to make substantial returns. They can give you a stake in this exciting market, without the potential difficulties of upkeep, maintenance, or selling a property.
How Much Money do you Need to Invest in Property?
While traditional property investments such as Buy to Let’s do require substantial capital, even at the smallest scale, alternative property investments such as Peer to Peer, REITS or Loan Notes have a far lower bar to entry.
Some REITS will let you invest for as little as £500, while Real Estate Investment Groups (REIGS) are closed to £5000 minimum.
Property Loan Notes commonly have a £10,000 minimum investment.
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.
Investing in 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, whilst delivering attractive returns.
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.
Peer to Peer Lending
Online peer to peer platforms have changed the face of property lending. Connecting borrowers with lenders directly, the absence of a third party financial institutions mean investors get a very attractive return on their cash.
Peer to Peer platforms allow individuals to lend money to other individual property developers, as well as businesses, and even other property investors.
There are even companies like Landbay who crowdfund their Buy to Let Mortgages from investments as small as £100 that are lumped together. What makes this attractive is that it means your investments are secured by property.
Since investors into Landbay see their money spread over multiple properties it also mitigates the risk of any one property defaulting. Terms are generally from 12 months up to 5 years, with better returns coming from leaving your money in for longer periods.
- Low bar to entry, you can invest as little as £100
- Loans are secured against property
- Loans are spread over multiple properties, lowering risk
- Peer to Peer lending is not regulated by the FCA
- Hidden fees may sometimes mean a different rate from the one advertised, so you need to check carefully
- Getting your cash out quickly or early can be difficult, depending on the platform.
- Most platforms don’t tell you where you money is going, they simply ask you to trust them that they only lend to experienced investors.
The property ISA is another quick and affordable way to invest in the lucrative property market. These stocks and shares ISA’s allow investors to put up to £20,000 p.a. worth of money into an investment pool which goes into REIT (Real Estate Investment Trust)
These funds purchase Buy to Let homes in major UK cities, and both your income and capital gains will be tax free.
Property ISA’s can be opened with just £100 starting capital, and you can invest up to £20,000 annually as per the standard ISA terms. You can even transfer across existing ISA balances.
- Invest with just £100
- Tax Free, and Free of Capital Gains
- Secured against property in some cases
- No minimum term on investments, or penalties for withdrawals
- Not regulated by the FCA
- May take some time to withdraw your investments