Property investments can seem complex at first. What’s more, it’s actually a fairly common misconception that you need to own a home at all to take advantage of the property market. With the internet and apps already having broken down the way we invest in various markets and assets, it makes sense that property investing should start to become more flexible, too.
But how do you invest in property with little money? What if you don’t have enough capital to buy a home or property outright? That doesn’t mean you’re cut out of the market. In this guide, I’ll look at how you can start developing and investing in properties without having to actually leap onto the ladder.
First Things First – Look at Property Investment Funds
When we think of property investment, we probably initially consider residential property. It’s easy to swing towards the old bricks and mortar. In some cases, people may even get property investment and property development confused!
A clear way to invest in properties without having to hold any kind of ownership, therefore, is to look at commercial buildings. In the UK, you can easily invest in property funds that give you a portion of the cut from commercial or office blocks. For example, you could choose to invest in a property investment fund that offers firm shares, rather than in actual buildings.
Property investment funds allow you to make money through staking interest in how a physical building will do over time. Most funds are likely to revolve around commercial properties, which does mean that there is also an element of risk.
For example, what happens if a property or storefront stays unoccupied? What if the high street continues to decline as a result of growing online trade?
Some people may not see property investment funds as a safe enough way to get behind commercial property. Therefore, it may be more prudent to look at options where you actively invest in companies, rather than their high street shells.
Alternatively, if you are really serious about property investment, you could look at REITs. Never heard of a REIT before? Don’t worry – it’s pretty easy to get to grips with.
What Are REITs?
A REIT is a Real Estate Investment Trust. Despite the Americanised language, it’s a system which is in active play in the UK and is readily available for budding investors to take advantage of.
Essentially, a REIT is more than just a property investment scheme. It’s a company. You’ll find that REITs have full stock market listings, which means that, to invest, you need to buy shares. What sets REITs apart from the pack is the fact that at least 75% of its company assets should be up for rent.
What’s more, at least 75% of its profits, too, need to arise through rental income. Therefore, it’s clearly identifying that it is a business which profits from property rental. You can then be sure that you’re dealing with a firm, or brand, that purely dabbles in the property market. You’re one step closer to being a property investor.
REITs also work a lot differently to other stock market companies in the fact that they need to offer at least 90% of the profits they make in the form of shareholder dividends. Once again, it’s a clear indication that it’s a company offering property investment opportunities.
What Do You Stand to Get By Investing in a REIT?
Before you leap into REIT investing feet-first, it’s worth considering what you’ll actually get by putting money into their shares.
Dividends, as mentioned, need to be on offer from a REIT as standard. This means that, on the whole, you can expect payments on a regular basis. Of course, the number of shares you own, and the amount you choose to invest, will impact on how much you get back. It’s simple mathematics.
Of course, while dividends are regular through REIT investment, they are always going to vary. The volatility of the housing and rental markets mean that there’s sadly never a guarantee as to how much a REIT will pull in over the year.
Factors which can affect REIT income, particularly dividends, include where they rent properties from, who to, and how much for. Unfortunately, this is something you’re going to have zero sway over. It’s a bit of a leap of faith for some investors.
The other way you’ll make money through REITs is, of course, via capital gains. I say ‘of course’, because if you know anything about shares, you’ll know that you can sell them at a profit.
As shareholders know, capital gains can be tricky to bank on. Unless you choose a REIT that’s really going places, or if you just so happen to catch the market at the right time, the chances of you making any good money from this source alone can be quite slim. However, there’s nothing to say you won’t make a tidy profit.
It’s ultimately the last resort for REIT investors, however. That’s because, when you sell your shares, you’re giving up your stakes. You’ll lose the right to keep earning those yearly dividends, and you’ll also have to pay tax on your sale.
How Do I Invest in a REIT?
Investing in REITs is as simple as searching the markets. You would simply invest in shares belonging to companies who make money from letting property. As mentioned, there are more than a few stipulations as to what makes a company a REIT, meaning it’s worth filtering out the parameters.
Beyond this, you can also invest in REITs through ETFs, or Exchange Traded Funds. These work similarly to shares; however, you’re not investing in one REIT alone. You’re potentially investing in a basket of several REITs. This might be a good opportunity for you to diversify your portfolio, or to at least protect your interests if you’re just starting out.
You can use a variety of trading platforms to search for REITs. For example, Freetrade is a great little app service that actively supports investment in shares for property firms. It’s worth taking a look at various online programs and suites which you can manage from home and on the go. If you’re already deep into the stock market and buying shares, you are already one step ahead of most people. Give yourself a pat on the back!
Are REITs a Good Investment in 2020?
There are plenty of great reasons to invest in REITs. One aspect which may throw you off is the volatility of the housing market, however. The fact is, 2020 is going to be a speculator year for many British markets. This, of course, is thanks to Brexit. Once the Brexit transition period kicks off, we’re likely to start seeing the Pound fluctuating again, and that’s going to make any kind of investment shaky. It’s going to be a fairly tense year unless you keep a shrewd portfolio.
Therefore, it’s worth looking at the benefits of REITs on the whole, not just in 2020.
Liquidity is Easy
Many people prefer using REITs to traditional property investment services thanks to how easy it is to access profits. Investing in and renovating property physically can take a lot of time and effort. Therefore, by investing in a REIT, you get instant access to profit that you can cash in whenever you like.
It’s a passive way of investing in property, perhaps. This is very appealing if you just want to cut straight to the dividends, and why wouldn’t you?
Income is regular
Immediately, you’ll get a return from a REIT. The challenge, of course, is knowing which one is best to buy shares in, and how much. As a REIT needs to shed nine tenths of its dividends to shareholders, this means you get a regular income stream. There’s no regularity or reliability when investing in property otherwise.
Rental income can be very reliable. As mentioned, the property markets are always likely to be shaky, especially with Brexit coming. However, coming out of austerity, people are still preferring to rent rather than to buy. Therefore, you immediately have a fair chance of returning some serious money.
There’s Little Capital Investment Needed Upfront
A huge drawback to property investment outside of REITs is the fact that you need a fair amount of money to actually get started. You need to stump up six to seven figure sums, occasionally, if you really want to make it worth your while!
By trading in REITs, you get a fairly easy start. You only have to invest as much as you can afford. You may be limited in terms of the number of shares you can invest in, and you may even find it limiting with regard to share value. However, REITs allow you to instantly leap into property investment without having to save piles of money in the first place. It’s a great entry-level option, especially with services like Freetrade around.
Other Ways to Invest in Properties Without Buying a Home
If REITs don’t appeal to you right now, there are a few other avenues you may wish to look at before buying a property outright. Once again, these options are often less money upfront, and are often much more flexible.
Home Construction Investments
Why invest in homes when you can invest in homebuilders? Many people find it much more lucrative to get behind one or more residential construction firms on the stock market than to invest in one or two specific buildings or properties. Simply put, new neighbourhoods are always going to pop up. There’s a huge thirst for new build homes right now, too – despite, as mentioned, the UK stumbling out of austerity and into Brexit.
Loan to Investors
Want to make a splash on the property market without ever having to touch the ladder? Think about acting as a loan agent. You could loan money to property investors at a specific rate of interest. This way, you get a nice little return and you get to help a fellow investor at the same time. However, this is an option that is going to carry risk. I’d obviously advise you avoid loaning any money out unless you know that a borrower has good credit, or that they are guaranteed to give you your cash back, with interest.
Invest in Property Firms
Similarly to how you might track down companies operating as REITs, it’s worth looking for companies that trade extensively in property. For example, you may wish to buy shares in firms that purchase buildings and use them for leisure pursuits. You may even choose to dabble in timeshare investment. Once again, this is a risky manoeuvre unless you have plenty of confidence on-side. In my personal opinion, it’s probably not worth taking too much of a leap unless you know a company is going to continue trading well in their specialism. As none of us can predict the future, it can be a real guessing game for experts, too.
How Do I Start Property Investing?
Property investing takes time, effort and money. Doesn’t everything? However, investing any amount of money in a property, residential or commercial, is going to need your full attention as well as financial oversight.
That’s why REITs offer such an attractive option at entry-level. Instead of having to spend hundreds of thousands on a base property you may not be able to flip, you can take a back seat and let others take those risks for you. You can take home regular dividends and build up a nice little stock of money without having to know much about the property market.
Of course, all investments carry risks. Investing is not for the faint of heart! Therefore, do make sure to do your research and to read up on what others have to say. Otherwise, please make sure to read my previous posts on investor platforms, programs and apps.