How to invest in property without buying a house
You don’t need thousands, you can get into the market for 10
Property can be a solid long-term investment, generating a steady stream of income while offering the potential for capital gains as prices rise.
However, for ordinary savers, property, whether residential or commercial, has always had two drawbacks: it requires a large upfront investment to get into the market and it is illiquid, with sales and purchases taking time and costing money.
However, there is positive news as the choices available to investors looking to enter the property market without the need to purchase a house or flat are becoming more favorable. An option worth considering is to approach lending companies such as Easy Street Capital or similar entities that specialize in assisting with financing real estate investment ventures, including rental properties. These lending institutions provide private mortgages to investors who aim to generate income through the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method. This approach enables investors to establish a consistent capital stream by repeating the process.
The International Property Securities Exchange (IPSX), scheduled to launch next year, will enable investors to buy and sell shares in commercial properties through a public marketplace where prices are visible to all and trading is instant. Owners of properties will be able to sell shares in their assets, which would then be traded on the IPSX, allowing anyone from individual savers to large pension funds to invest.
Mark Shaw, the chairman of Tritax, a fund management house that is backing the new exchange, thinks the launch of IPSX will democratise commercial-property investment. “It will open the commercial real-estate industry to a wider spectrum of investors, including those considering the sector for the first time,” he argues.
Investors will need to tread carefully, at least to begin with. Without plenty of supply and demand, the market will suffer from the same liquidity problems as commercial property.
In the meantime, there are several other novel ways into property.
Peer-to-peer lending
Online peer-to-peer platforms, including LendInvest and Landbay, let you lend directly to investors who are raising mortgage finance to purchase residential property, usually in the buy-to-let sector. You get a fixed return on the loan over a set period until it is repaid.
Commercial property offers that rarest of attributes: a decent yield
Your arrangement with the investor is purely financial – you’re not getting any ownership rights on the property that your money helps to secure, and the platform itself holds the security on the loan, so it has to take steps to get your money back after a default. Investments typically start at about 100 a loan, but it makes sense to build a portfolio to spread the risk.
Your return may vary depending on the types of loan you go for. These platforms employ their own underwriting team to assess the borrowers’ creditworthiness and the underlying investment’s prospects, so you can opt for loans judged riskier and therefore offering higher returns, or choose to play it safe. Annual returns range from 4 to 9 per cent.
This can be an accessible way into residential-property investment, but bear in mind that you are not actually acquiring property, only a secured loan on it. There is therefore no prospect of capital gains. Check charges and other terms carefully and be aware that peer-to-peer lending is not covered by the Financial Services Compensation Scheme (FSCS), so you won’t get a payout if a platform collapses.
Crowdfunding
For those who prefer direct investment, several online platforms give you the chance to own one or more properties with a group of other investors. Each platform advertises a number of potential investments – they could be residential flats or houses – and your money buys you a share of a limited company that makes the purchase.
Minimum investments start from 10 and you’re entitled to a share of the rental income generated by the property and profits when it is sold. Losses are also possible if prices fall.
These sites include The House Crowd, Property Crowd, Property Moose and Property Partner, and all operate with slightly different terms and conditions. Their pitch is that a relatively small sum of money buys you access to a diversified portfolio of residential-property investments. The fact that your money goes into specific properties is an attraction as is the fact that the limited company does all the work in finding tenants and managing the property.
On the downside, these platforms can be expensive. There are initial fees of 5 per cent or more, and they take as much as 25 per cent of any profits you make. You also have no control over how your properties are managed and it may be difficult to get your money back when you want it. Bear in mind too that, while crowdfunding platforms are regulated by the Financial Conduct Authority, investments on them are excluded from the FSCS.
Property Isas
Residential property cannot be held directly within a tax-free individual savings account (Isa) – it’s not one of the investments permissible under the Isa rules. However, the launch of the Innovative Finance Isa in April is beginning to bear fruit, enabling people to hold peer-to-peer investments and other types of alternative finance products within an Isa for the first time.
Bricklane.com, for example, has launched a property Isa consisting of a real-estate investment trust (a collective fund invested in property) held via an Isa-eligible online platform.
What you’re getting is exposure to a portfolio of rental properties chosen by the company to generate regular income and capital growth. You can draw down the income or sell your shares in the fund to realise any capital gains you have made.
This offers tax-free returns, although charges are high, with 2 per cent to pay upfront and a fee of 0.85 per cent a year. It is also worth bearing in mind that, in a new market, new products are likely to emerge all the time. None will have a track record, so tread carefully.
Unregulated investment schemes
These are often property-based. A recent offer from the developer Empire Property Holdings is a good example. It raised money from investors prepared to put at least 10,000 into a scheme based on making money from the permitted development rights reforms, which have made it simpler to convert commercial property into homes. The marketing offered a 27 per cent return over two years.
If you know what you are doing, or have access to good advice, and you conduct thorough due diligence, such schemes sometimes have merit. However, be wary of any unregulated investment; you’ll be required to state that you’re a sophisticated or high-net-worth investor to get access, and if something goes wrong you have no protection from official watchdogs or compensation schemes. “The onus is definitely on you to ensure it is a bona fide investment,” warns Ben Yearsley, of the Wealth Club, one adviser that does work with unregulated providers.
Some unregulated investments have turned out to be scams. Even where a scheme is on the level, though, check charges carefully, consider whether you will be locked into the investment and for how long, and make your assessment of whether the underlying property investment realistically can deliver the returns advertised.
Commercial property funds
Finally, it is worth considering commercial property funds, which invest in assets such as offices, factories and retail units. Many were closed for several weeks after the UK’s vote for Brexit in June sparked a panic in the UK commercial property sector.
Fearing a recession and a withdrawal of foreign investment, investors rushed for the exit, fund managers found themselves short of cash to repay those looking to sell, but didn’t want to be forced into selling their property assets too cheaply and so closed their funds.
Fund managers have now begun to lift those restrictions (see panel above) and some advisers think there are real opportunities in the sector.
“While Brexit does create headwinds for some parts of the economy and corresponding property sub-sectors, there are also businesses that have been beneficiaries,” says Jason Hollands, of the wealth manager Tilney Bestinvest. “It would be wrong to single out UK commercial property as one to avoid entirely since it offers that rarest of attributes: a decent yield.”
Look for a fund that offers a diversified exposure to different types of commercial property and avoid those invested in more Brexit-sensitive areas such as the City of London, where concern for the UK’s financial services sector may depress returns.
Commercial property funds back in business
by Carol Lewis
Property funds are slowly beginning to reopen, having barred their gates to stem an outflow of cash in the wake of the vote to Brexit.
The funds closed at the end of June after investors started to cash in over worries that the referendum result would prompt a property price crash – net retail outflows from the sector hit 1.4 billion in June. Meanwhile, fund managers marked down the value of the properties they owned with a “fair value adjustment”, typically of about 5 per cent, but in some cases up to 15 per cent.
Now two of the largest funds – Henderson UK Property Trust and Standard Life Investments UK Real Estate – have said they will reopen their funds within a fortnight. M&G Property Portfolio is expected to follow. They join Threadneedle UK Property Authorised Trust and Aberdeen UK Property which have already reopened.
Closure made sense: if lots of investors want to get their money out of a fund at the same time, then the fund’s managers are forced to sell properties quickly and possibly at sub-standard rates. A UK property fund managed by Aberdeen Asset Management is said to have sold one commercial property in west London for about 11 million less than its original asking price in the rush.
Much better to close the doors and take a more considered approach to selling off assets to give themselves a cash buffer. Many fund managers will also be hoping that stability in the economy since the referendum will help to allay fears and prevent a rush for redemptions the moment they reopen.
Wealth managers point out that while there is a risk of future fund closures, if there is another run on redemptions, property is a long-term investment and fund yields of about 3-4 per cent may seem low, but they are attractive given the state of interest rates.
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