Exploring alternatives to buy-to-let in evolving property market.
Buy-to-let has traditionally been the predominant way for investors to participate in the property market, and even this, over the years, has alienated many investors due to increases in house prices.
The difference between equity and bond co-investment
Tax changes have significantly squeezed returns for buy-to-let landlords. The government has introduced an increased stamp duty on second homes and international overseas buyers whilst making mortgage interest payments no longer fully tax deductible. At the current level of house prices, this has meant that the returns on buy-to-let investments are simply not there.
Regulation for private landlords
Managing rental properties has become much more complicated due to stringent changes in regulation. As the owner, you are held liable if requirements are not met and this cannot be passed to an agent. If you plan to let the property out from abroad – you have the added pressure of being liable for a property you cannot personally oversee.
Alternative ways of investing
These challenges have led many investors to seek alternative ways of generating returns on UK property. Here is a summary of the alternative ways to invest in real estate.
REIT is a pool of property assets. They can be publicly traded on major exchanges, publicly registered but non-listed, or simply a private fund from a company that owns and operates income-producing real estate.
REITS are a passive investment. However, lack of liquidity, high fees and lack of transparency can turn away more sophisticated investors in search of greater returns.
2. Real Estate Funds
One can also invest in a packaged-up group of real estate companies in the form of exchange-traded funds (ETFs) and mutual funds. This can offer broad diversification and potentially low costs. However, investors are left exposed not only to the performance of the property market, but also to the performance of the companies themselves, which tend to offer fairly low returns, when compared to other investment opportunities.
3. Hard money loans
If you have money to lend but want none of the hassle of property ownership, offering a hard money loan to a developer is a viable strategy. Due to the risks involved, many investments of this nature provide high returns with no management. However, this is dependent on you finding a trustworthy developer what will use your funds wisely. This is ideal for the high-net-worth individual who has no time to spare and can afford the extra risk. For more cautious investors, however, offering hard cash to someone they do not know, without investment protection in place, is often fraught with issues.
4. Online property co-investing
Sometimes also referred to as fractional ownership or crowdfunding, online property investing has grown popular in recent years. Co-investment allows investors to buy a part of a property or group of properties, alongside many other investors. Investors can either own a share of a property or offer finance in the form of a loan. Through financial structuring, platforms are able to provide products with different risks and rewards – such as mezzanine loans – which pay a fixed return and have a higher priority over other repayments and thereby are lower in risk.
This form of property investment is popular because it is accessible and there are opportunities available for investors with diverse risk appetites. It also offers income and capital growth while providing liquidity and variable tax and regulatory benefits.