Four ways to invest in property without becoming a landlord
The appeal of managing your own buy-to-let portfolio has been hit in recent years with increased taxes and restrictions on reliefs that have dented landlord profits, as well as increased regulations.
The Renters’ Rights Bill currently going through Parliament will also introduce tougher requirements to evict renters and limit mid-contract rent rises. All this is driving many landlords to exit buy-to-let.
But the returns from property can still be attractive, especially compared with volatile stock markets.
Luckily, there are ways to invest in property without the added responsibilities and headaches of being a landlord.
Here is what you need to know – with plenty of options to start smaller than having enough for a full house deposit.
Shares
From housebuilders such as Persimmon to property websites such as Rightmove, there are plenty of listed companies on the London Stock Exchange in the housing sector that you could put money into.
You would then share in their success if the share price grows and if they pay dividends. Of course, you will also lose money if their share price drops.
There are extra responsibilities with shares though. You will need to build a diversified portfolio across different sectors so that you don’t lose all your money if the property sector crashes.
There may also be fees to pay for holding your shares on an investment platform, which can eat into your returns.
Property funds
If you don’t have the time or confidence to research shares, you can get exposure to the property market through property funds.
These are run by fund managers who will build a diversified portfolio typically invested in commercial properties such as offices, warehouses, industrial units or shopping centres – rather than housing. Some will either invest across a mix of property sectors, others special in a narrow part of the market or a particular region.
Jason Hollands, managing director of investment platform Bestinvest, said: “Physical property funds offer investors diversification beyond equities and bonds and a stream of rental income can be useful for those who are retired.
“With many people already having significant exposure to residential property through their own home and mortgage, investing in a commercial property funds provides a slightly different dimension. Here they can benefit from the security of long leases by business tenants and accompanying rental income.”
When choosing a property fund, Hollands said the quality of the tenants and the length of their unexpired leases – the longer the better – low vacancy rates and the exposure to attractive locations are important considerations over portfolio resilience.
One big risk though is that property is an illiquid asset so you cannot sell in a hurry in the way you could decide to ditch some shares.
Hollands added: “A fund can’t part-sell an office block or warehouse it owns and in times of uncertainty this may be difficult to achieve at a reasonable price. Open ended property funds have therefore experienced periods in the past when they have had to suspend dealing – the ability for investors to take their cash out – when large numbers of investors want to take their cash out at the same time.
“Even in stable times, such funds have to hold significant cash balances to address day to day demands for possible withdrawals which can water down returns.”
There are also investment funds and exchange traded funds that invest in property stocks. Both types of property fund will have manager and platform fees to consider.
Real estate investment trusts
An alternative to property funds are real estate investment trusts (REITs).
This is a type of investment trust – backing a mix of commercial properties – that is listed on a stock exchange.
Rather than your money going directly into properties, you are purchasing a share in the trust and share in the ups – as well as the downs – of its share price and market performance.
Many REITs also pay regular and attractive dividends, often quarterly.
Nick Britton, research director of the Association of Investment Companies (AIC), said: “Being a landlord isn’t for passive income – you will find yourself running a property business, grappling with complex tax, legal and regulatory requirements. By contrast, investing in a REIT is as easy as buying any other share.
“A particular perk is that REITs are very tax-efficient – there is no tax to be paid by the REIT itself, so if you hold REIT shares in an ISA or pension you’ll effectively receive rental profits tax-free.
“Although you can sell the shares at any time, REITs should still be seen as a long-term investment. Their share prices will fluctuate and when the property market is in the doldrums, this will be reflected in the prices. You need to be patient and ideally take a five to 10 year view.”
Property funds and shares can be held in an ISA, so any returns can be taken tax-free, unlike direct rental income.
Peer-to-peer lending
You could also fund buy-to-let or development loans directly through peer-to-peer lending platforms such as Kuflink and LandlordInvest.
These can offer double digit returns for funding landlords or developers directly.
However it can also be more risky and you need to check the P2P lending platform is regulated by the Financial Conduct Authority (FCA).
Risks include borrowers falling into arrears and even defaulting, potentially leaving you with nothing. There is also no Financial Compensation Scheme (FSCS) protection if a platform goes bust.
There are also platforms such as TAB Property that provide fractional ownership of assets such as hotels and office spaces, as well as residential property.
Any returns earned from a property’s income will be paid in proportion to your stake.
Duncan Kreeger, chief executive of TAB Property, said: “Fractional ownership now allows investors to enter high-grade real estate markets without the usual high minimum investment thresholds. This approach diversifies exposure and mitigates the risk of putting all your eggs in one basket.
“For anyone considering this type of diversification, my advice is to start with a clear investment plan. Determine your investment horizon and desired returns. Look for platforms offering access to diverse asset classes and conduct thorough research on each opportunity.
“Understand the terms, risks, and potential rewards associated with your chosen investments.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
