How to be a property investor: Alternative ways to invest in property
There are three ways to invest in property that offer a more hands-off investment than traditional buy-to-let. One is via the traditional commercial property fund. Two more innovative developments are peer-to-peer (P2P) lending and property crowdfunding.
Commercial property funds
When you invest in a property fund your money buys shares or units in the fund. It is pooled together with other investors and a fund manager uses the money to invest in commercial property such as shops, office blocks, retail parks and warehouses. Returns are generated from rent from tenants and capital growth over the long-term.
In normal circumstances, selling units in a property fund is fairly straightforward. However, the vote to leave the EU has led to some investment companies temporarily halting withdrawals from property funds. Aviva, Henderson, M&G and Standard Life have all locked in investors for the time-being.
This is because too many withdrawals in a short space of time could mean the fund has to sell assets at large discounts to make redemptions, and this would have a detrimental effect on those investors remaining in the fund.
You can also invest in commercial property investment trusts. These are traded like company shares on the London Stock Exchange and are still available to buy and sell following the Brexit vote.
This involves a lending platform acting as an intermediary between investors and borrowers. The platform makes money by charging fees to both parties.
An investor decides how much they want to invest and, depending on the lending platform, how their money will be used.
The return from investing this way can be higher than traditional buy-to-let. Borrowers, meanwhile, can often get loans with lower interest rates than those available from a traditional lender.
Peer-to-peer property investment
Diagram courtsey of LendInvest.
Platforms offering peer-to-peer property investment include Landbay, LendInvest, Proplend and Wellesley & Co.
Landbay offers buy-to-let residential mortgages in England and Wales, focusing on professional landlords who tend to hold their property portfolios in special purpose vehicle (SPV) limited companies. You can invest as little as £100 in a tracker at 3.99% a year.
LendInvest offers loans secured against property. It offers annual returns from 5% upwards.
Proplend focuses on loans secured against income producing commercial property in England and Wales. It offers investors higher rates of 6.44% to 9.38% a year.
Wellesley & Co ‘secures’ its loans against property assets, and only ever lends a conservative percentage of a property’s value (typically no more than 75%). It offers annual interest of up to 3.75%.
“Investing in property through a marketplace cuts out many of the negatives of being a landlord,” says LendInvest CEO and co-founder Christian Faes. “You don’t have to worry about stamp duty, capital gains tax, or gaps in tenancies. And you'll never get a call from a tenant in the middle of the night about a broken down boiler.
“Instead you do get to enjoy a great, consistent return, and can diversify across a range of different properties much more cheaply than if you wanted to build your own traditional property portfolio."
Another option for investors looking for a hands-off opportunity or portfolio diversification, crowdfunding involves multiple investors pooling their money to buy a property which is then let to tenants.
Various web platforms including Property Partner, Property Crowd and The House Crowd bring investors together and then identify and manage suitable properties.
Once enough money has been invested to buy a particular property it is purchased through a type of company called a Special Purpose Vehicle (SPV).
A crowdfunding set up, and the fact the property is owned by a company, negates the need for investors to pay higher stamp duty or worry about upcoming changes to the tax payable on rental income. However, there will be both purchase costs and fees for the ongoing management of the property.
Don't miss the previous articles in this series:
- Our national love affair with property
- A history of property prices
- Property versus pensions
- Buy to let: Buying a property
- Buy to let: Letting it out
- Buy to let: new taxes for landlords
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.