From complex regulatory and tax reforms to rising interest rates driving up the cost of buy-to-let mortgages, it’s fair to say that private landlords have taken a hammering in recent times.
Not only is being a private landlord becoming less profitable, it can also be a huge headache when trying to do it all on your own, with many buy-to-let investors quitting the market altogether. So, what about the alternatives? What’s the best way to invest in property in times of rising interest rates, inflation and market uncertainty?
Property crowdfunding and REITs have emerged as increasingly popular choices in recent years, promising solid returns with fewer of the drawbacks associated with traditional buy-to-lets. But how do they stack up? Are they really a good alternative for landlords?
Important note: The advice provided in this article is general in nature and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek professional advice. If you choose to invest, the value of your investment can both rise and fall so you may get back less than you put in.
The Rise of Alternative Property Investments
Historically, property investment has required access to significant amounts of capital, with the most popular option being a buy-to-let mortgage, typically on an interest only basis.
But with interest rates climbing and expected to rise further still, many investors are wary of borrowing in the current climate. What’s more, while booming house prices over the last few decades have made buy-to-let investments attractive, increasing tax and regulatory changes and the anticipated property crash mean the situation is fast changing.
Property Crowdfunding
Crowdfunding has risen to prominence as a way of funding inventions, projects and other initiatives, and now it’s increasingly taking centre stage in property investment circles. Critically in these times of rising interest rates, it’s possible to get started with very little capital outlay – and no borrowing.
Property Crowdfunding
Crowdfunding has risen to prominence as a way of funding inventions, projects and other initiatives, and now it’s increasingly taking centre stage in property investment circles. Critically in these times of rising interest rates, it’s possible to get started with very little capital outlay – and no borrowing.
What is Property Crowdfunding?
As with other types of crowdfunding, property crowdfunding is a type of investment where capital is raised from a large number of people (ie. the crowd), which is then used to buy a property to either let out or in some cases sell on. Depending on the opportunity, it may also be used for lending money to a developer.
Typically, individual investors contribute a relatively small percentage of the total investment. Each investor then receives a share of the income and profit that is generated.
Advantages of Crowdfunding
Property crowdfunding is attractive for many reasons, not least the fact that investors can get started with less capital.
Unlike purchasing a property directly, where you need to find 25% deposit, as well as the funds to cover stamp duty, surveys, searches and legal fees. Plus the inevitable additional costs for any refurbishment work, redecoration or repairs that will have to be done before the property is ‘rent-ready’ .
For those with access to more money, another key advantage of crowdfunding is that it’s easy to diversify your investments by spreading it over multiple opportunities and thereby minimising your risk. For example, you might choose to diversify across different geographical regions, or mix residential and commercial property investments in different areas.
Another big advantage of crowdfunding is that it’s generally a hassle free investment. Whereas a landlord needs to worry about finding tenants and managing the property, with crowdfunding it’ll be someone else doing all the hard work.
Drawbacks of Crowdfunding
For many people, property crowdfunding opens the doors to property investment like never before – but there are of course some cons.
One of the biggest drawbacks is that returns can be lower than they would be if you owned the property yourself, since the developer also needs to make money on the investment. Fees vary depending on the investment but often include things such as asset management, account and transaction charges. Always be sure to check the fees involved before you invest.
Another disadvantage of crowdfunding is that there’s no hands-on control. You are relying on the management company to ensure the development makes a profit, so if decisions are made that aren’t to your liking, your only option is typically to sell your share. It may also be hard to carry out due diligence on the property or development before you invest.
Remember also that many schemes have a minimum investment term, and there may be penalties if you want out sooner.
REITs
Another strategy promising hassle free returns without needing lots of capital is to invest in REITs – or Real Estate Investment Trusts. Again, this is another way to invest without needing to buy and manage a property yourself.
What is a REIT?
In short, a REIT is a company that owns, operates and finances property on behalf of investors, allowing individuals to invest in property in much the same way as they would with stocks and shares.
Typically, a REIT will often own a diverse range different properties, which may be spread across the residential, commercial and industrial sectors or focused on one area depending on the investment. Rental income is paid out to shareholders through dividends.
Although REITS have been around since the 60s in the US, they only came to the UK in 2007. Today, they are a popular type of property investment, with the three main types being:
- Equity REITs: Companies that own and operate properties that produce income.
- Mortgage REITs: Companies that lend money to property owners and operators through mortgages and loans – or through acquiring mortgage-backed securities.
- Hybrid REITs: Use both investment strategies together.
In order to qualify as a REIT, companies have to meet a number of stipulations, including investing more than 75% of their assets in rental properties and making over 75% of their profits from rental income. In addition, 90% of all rental profits must be paid out to shareholders.
Advantages of REITs
As with crowdfunding, one of the most appealing things about REITs is that you can invest with little capital outlay. Unlike traditional real estate investments, REITs are also highly liquid and can be bought and sold quickly through major stock exchanges.
As with crowdfunding, you won’t need to be involved in managing the property on a day-to-day basis, so they can make for a very hands off investment.
In addition, REITs are considered a tax efficient way to invest in property since they are exempt from UK corporation tax.
Perhaps one of the most attractive things about REITs is that they allow individuals to invest in real estate assets that may otherwise be out of reach, such as retail and leisure complexes. REITs also often hold investment assets across a wide selection of property types, which can be ideal if you’re looking for diversity.
Drawbacks of REITs
Many of the drawbacks of crowdfunding also apply to REITs. Returns may be smaller than if you invested in a property outright – and there are also those management and transaction fees to watch out for.
As with any type of investment, there’s always a degree of risk. The value of your investment is subject to the market, so it can go down as well as up.
One common pitfall to avoid is investing in overvalued REITs – or one that is heavily indebted. As always, be sure to always research any option carefully and understand exactly what you are investing in.
Crowdfunding and REITs: The Best Ways to Invest in Property?
While there are obvious advantages of property crowdfunding and REITs, the best investment for you depends on many different factors – and there are always pros and cons to every avenue. If you’re looking to invest in property, it’s always worth seeking the advice of a property investment professional who will be able to help you navigate the market and find an investment to suit your individual needs, goals and circumstances.
If you would like to speak to one of our Portfolio Managers here at Sterling woodrow, give us a call or you reach out using our contact form and we will be happy to discuss your current position and what is is currently hot and what is not in the property market.