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10 Ways to Start Investing in Real Estate

by Nikki Dale -

There are many ways to invest in property, with multiple asset classes, vehicles, and alternative investments to choose from, ranging from low to high maintenance.  Most investors are attracted to their formula, opportunity or even ‘guarantee’ to make money, whether that is, annual rental return income, fixed annual interest, property growth or all three.

With so many options, landlords and investors alike can add diversification into their portfolios, and for beginners there are ways to test the market before jumping in with both feet.

If you are a beginner, or going into a new sector that you have not invested in before, it’s important to seek the right guidance from the right company/advisor.

Helpful article: Getting the right advice, doing your research and your own due diligence is key

Buy to let property landlord

The absolutely No.#1 standard, traditional way of investing in property in the UK is buying a property to rent out to a tenant and receiving monthly rental income.  For any landlord or wannabe landlord, the thought of the regular income sounds great, plus the long-term growth potential in a property when you sell it in the future.

However, it can be daunting and time consuming becoming a landlord, it’s the most hands-on approach in terms of call outs for repairs or problems, and regular maintenance. As well as finding and replacing good tenants.   There is the option of appointing a management company and they can deal with most of this for you, for a fee.  It’s simply a question, of how many costs can you afford to take out of the gross rental income.

Buy to let property as an investor not a landlord

For all intents and purposes this is the same property-buy as above, however there is a difference when buying a property for pure investment and passive income – with no intention of being hands-on.  There are many developments in sought-after towns and cities that specialise in, mainly apartments, for buy to let purchase and passive income.  The management company has already advanced rental appraisals and specialises in lettings too.  This approach works really well for investors who are cash rich and time poor.

PBSA Student Accommodation

For many UK university cities and towns demand for student accommodation far outweighs supply.  Developers specialise and build purpose-built student accommodation, normally a mix of studios and  cluster en-suites, which investors can purchase for as little as £55,000 – £60,000 (cash-only).  This asset class has grown in popularity exponentially in the last decade, and savvy investors and landlords see it as a great diversification to their portfolio.

PBSA developers offer investors assured rental returns in the first years of the project, up to 8%, 9%, even 10% Net P.A. in some second and third-tier towns and cities.

Due to specialist management and letting agencies and high demand, void periods are low, with occupancy levels +90% in many UK PBSA developments – albeit not during a pandemic of course.  PBSA investment is commonly bought off-plan to secure the best cash price.

READ MORE: How to invest in student property 

Buying property off-Plan

Investing in off-plan residential property is as simple as it sounds; you are buying off an architects’ floor-plan or during construction. Many developers that present off-plan opportunities to investors offer a number of benefits.

Off-plan prices are around 10% -15% lower than the market value. In some areas, you can make up to 40% growth within 3-4 years when purchasing off-plan, or in the construction phase.

First pick of units – with the entire stock available, this is another benefit of investing early into the development. High floors, units with balconies and penthouses or duplexes are often the first to be snapped up.

If the project is buyer-funded you will sometimes earn interest on the deposit you have paid to the developer for your property, normally between 2% -5% p.a.  This is very common with Purpose-built Student Accommodation projects. 

Flipping property

Buying a property to flip can be looked at in a few ways.  A property that is bought below market value, that needs a renovation, that can then be sold for a higher price.  A flip project of this nature can sometimes be a bit of a money-pit – unless you really know what you are doing.

Similarly, you can purchase in an area that is growing in popularity, maybe a regeneration area for instance.  If you buy and hold and rent in the interim period, you could sell a few years later for a great profit.

Opportunity with new builds.  Some developers, especially if their project is part-way buyer funded, will allow investors to pay deposits on units and upon fruition of the project, the units have reached a higher price.  Naturally this is a great time to flip for a profit in a 12 – 24 months’ timeframe.

REITs

REIT is an acronym for Real Estate Investment Trust.  A REIT is a company that finance or own income producing property across a range of real estate sectors.  It’s a vehicle for private investors to pool their funds – similar to a mutual fund or exchange traded fund (ETF) – which the REIT then uses to invest in property to generate income.  The majority of REITs are equity based. Meaning the REIT is listed on a stock exchange.

Like any investment there are pro’s and con’s.  Most attractively, vast majority of the income generated goes to the investor.  Part of its specific criteria, that a REIT must meet to qualify, includes distributing 90% of its net property rental income to its investors.  Also, a REIT firm in the UK, must hold at least 75% of its gross assets in rentals and generate at least 75% of its profits from these.  It must own at least three properties and no individual property can be more than 40% of the fund’s total asset value.

A REIT can be excellent way to add income and growth to your portfolio without adding too much risk, but it comes back to researching very carefully the safest REIT for you, and also being mindful these investments tend to have a better performing long-term history.

HMO’s

HMO is an acronym for House of Multiple Occupation.   Essentially, it’s a shared property by three or more independent people, each occupying a room and sharing the facilities like the kitchen and bathroom(s).  A HMO would be the original and typical accommodation most university students would opt for.

For an investor, it’s a case of deciding if the benefits outweigh the disadvantages.  Rental gross can be much higher than renting a similar property to one family, and if one of the HMO residents move out, the loss of income is only a proportion of the monthly rental.

However, HMOs can be a rather complicated investment.  Mortgages can be more difficult to secure, and the start-up is normally very expensive compared to other buy to let / property investment options.  Once set-up as a HMO there are many rules and regulation the property is then governed by.  These can on occasions have a negative impact on the growth potential and the ability to sell on.

Here are a few alternative property investment options that are linked to property development funding.  Ideal for low capital investors or for the more hands-off investor or landlord looking to diversify their portfolio.

Property Loan Notes or Bond

Property bonds or loan notes are essentially an IOU.  They allow you to invest into the property market, but not in a tangible, traditional sense, as you are giving a ‘loan’ to a property development company for a pre-stated number of years – commonly two to five.  They are popular in the real estate development industry, as developers have valuable assets to secure the loans against. Top tip is secured loan notes are far safer than unsecured.

If you are looking for a way to generate passive income, that pays very appealing rates of interest, plus your capital is secured against property assets – property bonds or loan notes could be a good option for you.

This type of investment product (known as a ‘financial promotion’) can be an extremely attractive opportunity for any prospective high net worth individual, sophisticated investor or self-certified investor.

There are many advantages.  Annual interest payments can be higher than traditional property yields, circa 10% net P.A..  It’s popular among investors due to its short-term exit strategy and fixed sum maturity.  Plus, it’s less volatile than the stock market.

It is however, important to note, these investments are not regulated by the Financial Conduct Authority (FCA) and there is a risk of losing some or all of your investment.  That’s why choosing the right developer, with the right product is absolutely key.

READ MORE: Best fixed rate property bonds 

Peer to Peer lending (P2P)

P2P is a simple way to invest in property with a low entry starting point.  Investors lend money to borrowers with cash secured against residential or commercial properties. There are several UK secured lending platforms, starting from £500.

Innovative Finance ISA’s (IFISA’s) are offered by P2P platforms and investors may be able to benefit from, their money they invest being easily accessible (some companies/products will release monies back in 2-3 days)  and also tax-free interest and tax-free capital gains on their annual ISA £20,000 allowance.

P2P property market has come to include a range of business models. Some offer products that allow investors to choose specific projects, while others automatically invest money across a variety of loans based on an individual’s appetite for risk.  Many lending platforms have sprung up in recent years, offering short-term finance, commercial and residential property development loans and buy-to-let purchases.

So, while there are many attractive selling points of P2P, naturally there is a level of risk and one downside to P2P loans is they are not protected by the Financial Services Compensation Scheme (FSCS).  Meaning, choosing safely is down to the investors thorough due diligence.

Crowdfunding

Property Crowdfunding is when a group of people pool their capital to buy a single property asset. This means that each investor owns a small share of the investment.

It’s a very simple concept, whereby the platform identifies a suitable property which dictates how much is needed into the fund. As an investor you decide how much you want to invest, which is anything from £100 to £1,000 into the pool, depending on how much you can afford.

If you have a small amount of capital, this is a good way to get involved in the property market, but essentially, it’s like a watered downed version of a property investment.  Your returns will likely be far lower than owning property directly. And you have no control over the property management, rent, location, or even if the property is kept or sold.


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