There’s something satisfying about investing in property. Unlike stocks and shares; property is a tangible asset that you can appreciate with all of your senses.
Property also tends to be a stable form of investment which generally increases in value (notwithstanding some unforeseen future event), and it can also provide a reasonable income from rent if you decide to follow that direction.
However, initially purchasing property can be challenging. You need to have funding approved, plus have some form of capital for the deposit. On top of that, you will need money to cover all the legal fees and duties, as well as having enough extra to oversee any maintenance and running costs.
If this is you, don’t despair as there are ways to invest in property and still enjoy the associated benefits – without actually buying a property. Sounds a bit crazy, right? Rest assured, it is possible, and we will show you how.
Peer-to-peer lending is probably one of the easiest ways to invest in property. As an investor you lend your money to borrowers, using an online platform to complete the process, instead of using a third-party middle man such as a bank. This potentially provides investors with a higher return.
Depending on what provider you use, it’s now possible to invest your money into residential property through this form of lending. Your cash is split up across multiple loans, which are usually directed at buy-to-let mortgages. It tends to be a less risky form of investment as your money is spread across different investments in multiple locations, rather than being committed just to one investment.
Like all ISAs, income and equity gains are tax-free, making this an attractive option for those who have up to £20,000 a year to invest. Your cash is put into an investment pool, where it is held in a fund. This is then used to purchase buy-to-let homes, generally in the major cities of the UK (if you choose the Regional Capitals fund), or you can opt for London property. You receive pay-outs on the values and rental income.
You can start with just £100 and although you won’t get tax-free benefits above £20,000, you can invest as much as you want. Plus, you can combine other ISA’s into your property ISA.
Property funds are classed as an open-ended investment company (OEIC) or a unit trust with the end investment being property. These collective property funds from many investors are generally centrally managed and invested in property or property shares. How much you invest is up to you; you can start small and build up your portfolio while keeping risks at a minimum.
To get started, you purchase shares or units, the price of which can fluctuate daily. Your manager then invests the pooled funds from all the investors in such a way that provides all investors with the best return for their money. The return may come in the form of rental income from commercial properties or interest earned through bridging loans. Part of your investment could also go directly into a physical property to provide you with capital growth income.
Because it is a managed form of investment, there will be a fee payable which is generally 1-1.5%. Tax will also need to be paid on dividends and capital gains.
Although property funds are used to invest in all types of property, typically they are used to invest in commercial properties and developments. These tend to have a higher return than residential properties.
Options to invest in residential property through property funds is more limited, but not impossible, as there are companies that offer opportunities to invest in housing property.
Real Estate Investment Trust
A REIT is a property investment company where 75% or more of the profits come from rental and 75% of the assets are concerned with the property rental business. 90% of rental income is paid out to investors. It can also be traded on the stock exchange, making it different from other property investment opportunities.
Investors are drawn to REITs due to the high percentage payout. There is also no corporation or capital gains tax payable (a strategy to encourage investment), so dividends are only taxed once. There are often long-term rental contracts in place, which offers peace of mind to investors looking for a reliable source of income.
Sometimes property developers offer property bonds to investors as a way to raise finance for developments. For investors, they are a good way to get into property investment without having to build a portfolio.
After buying the bond, you will be given a certificate of security against the property you’re funding. You’ll be paid a fixed rate of interest for the term of the bond, which is usually 2-5 years. At the end of the term, the investment is returned.
When you put your money into property crowdfunding, you are investing directly into a property. You will receive a return on any rental income plus a share of the capital growth. Investments can start from as little as £1 (dependent on the company you use). This makes it a great way to start in property investments. It also helps start-ups or new businesses, as these are the type of borrowers our crowdfunding investment goes towards.
Although renting a room might not seem like an investment, it’s still a way to earn from property without buying anything new. Perhaps you have a large house with empty rooms; taking in a lodger can generate extra cash so viewing your room as an investment opportunity can help to create an income from your property.
Earning an income from property does not have to rely on physically buying bricks and mortar. If you choose to look at funding options as a good home for your spare cash, property funding could be the way to go. But if you are still unsure, speak to an independent financial advisor.