How to invest in property without buying a house
Investing into property has long being one of the most favourite asset backed investments for investors. And it's no surprise - it has consistently shown fantastic long term and short term returns.
With more and more new property investors able to have entered the market over the last decade or two, thanks to historically low interest rates it's made investing in property via the likes of buy-to-let a relatively easy option.
But with the changes to buy-to-let, and with investors having an increased awareness of the importance of diversification, many start looking at other options - and often asking whether it's possible to invest in property without buying a house.
The short answer? A very confident yes.
Buy-to-let is by no means the only option for getting involved in property investments. In fact, it's one of many, with options divided across a range of approaches, depending on whether you want to be an active or passive investor or - as is what essentially the focus of this post - a direct or indirect investor.
Lauren explained recently the difference between direct an indirect property investments, but if we understand that direct opportunities are those where you're generally buying the property yourself, indirect are those where you do exactly the opposite - and become a property investor without needing to buy a house.
With various options available, I want to look at some of the most notable of these opportunities today.
Residential property development projects
One of our favoured ways of investing in property without having to buy a house, residential property developments give you the opportunity to invest in a development of homes from the very beginning - often at the stage of purchasing the land.
Although you are still investing in houses, the approach means you not only don't have to manage a property (or portfolio of properties), but you don't even have to think about it - once you've invested your capital, in many ways you simply let the property development company get on with the construction and selling.
It might sound like a simplified view, but the reality isn't much different. Assuming the residential property development opportunity is right for you and you've completed your due diligence, there's next to no involvement required from you as the investor after this point.
The rate and period of return for such opportunities varies from deal to deal, but generally speaking it's between 1.3x and 1.8x multiple money return, with return periods achievable within as little as 18 months in some instances.
For instance, if a residential property development project targets a 1.5x return within 22 months and you invest £100,000, you would expect to make £50,000 on your investment, equaling a £150,000 total return.
Our recently closed investment opportunity at Chilton is a perfect example of residential property development projects. Launched on the GrowthFunders platform, it's a true co-investment opportunity, bringing retail, professional and institutional investors together, closing the £400,000 investment round with over a month to go.
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (known more commonly as a REIT) is a popular way you can invest in property indirectly, and which can be even more 'hands off' than residential property development projects.
In essence, a REIT is a company that owns, operates or finances income-producing real estate. These companies have to pass strict regulation to become a REIT and they often trade on major exchanges, which means that property investors have a liquid stake in real estate.
How it works on the highest of levels is that an investor will invest into a REIT, which will give them a stake in a range of properties. The investor will then get a percentage of the income generated by these properties.
Whilst investors will often invest primarily for the regular dividends, their shares in the property could go up in value (depending on the current state of the market - they could also go down), potentially seeing a capital return. What's more, since these shares are traded on major exchanges, if you as an investor want to make a quick sale/buy then you can often do so within minutes (although some REITs are privately owned and in that case selling/buying may take more time, but this entirely depends on the REIT you invest).
A prime example of a REIT is the British Land Company, one of the largest property development and investment companies in the UK. Founded in 1856 and officially becoming a REIT in 2007 (when they were introduced in the UK), their assets were worth an estimated £14.5 billion in 2016.
And importantly, one of the key benefits of investing via a REIT is that you can hold your shares in a tax free ISA, giving you £20,000 (as of the 2017/18 tax year) of tax free investments.
Peer 2 Peer (P2P) lending
An up and coming area of property investing, Peer 2 Peer (often abbreviated to P2P) lending is receiving an increasing amount of press at the moment. Another method of debt financing, it basically cuts out the middleman.
For property investors, you can invest into a bond that has an agreed interest rate and from that bond, the money will be lent out to property developers. This approach therefore means that the loan is secured against an asset - or assets - which in this case would be the land being acquired or properties being built.
From here, property developers will use the capital to build out projects and sell them, with the profits then returned to the distributor of the bond and subsequently, the profits divided up and distributed to investors.
On the side of the borrower, P2P lending can be seen as a more efficient way to use investors' capital to fund projects. The borrower would agree on the amount borrowed and the interest rate could vary depending on the issuer and the credit score the borrower has.
A great way to be able to invest in property in a completely indirect way and not have to be involved in any of the managing and running of the properties, this complete hands off approach is an attractive one - but it also means you get little visibility into which properties your money is being invested into.
Listed property companies
Similar in principle to REITs, listed property companies that aren't REITs will usually be because they're too small for REIT status or they simply choose to not operate as a REIT (due to the strict criteria).
An attractive way of investing into property without actually buying and owning property, these companies are listed on exchanges and they either own, develop and manage property on behalf of shareholders.
You invest via these companies by buying their shares - which importantly, can go up or down in value depending on the current state of the market - you can see returns in both growth and income formats: growth by selling your shares after a period of time should they increase in value and potentially income should the shares pay out dividends.
Importantly, some of these companies invest in specialist sections of the property market, which may otherwise be extremely hard to access unless you have large amounts of capital to invest.
For example, if you wanted to specialise in ‘trophy’ real estate (e.g., The Shard in London), you would need a considerable amount of capital to consider investing. However, if you own shares in a company that specialises in this form of investment, then you have an indirect route in which you could be involved.
Investing in property without buying a house is a real possibility
Investing indirectly into property is favoured by many investors, often due largely to the fact it requires considerably less involvement than if you were buying a property directly (and therefore have the responsibilities of everything from legalities right through to the on-going maintenance of the properties).
Importantly, there are now more ways than ever to invest into property without actually buying a house since the emergence and increasing popularity of the likes of co-investment via property crowdfunding and Peer 2 Peer lending.
Such platforms have made property investing more accessible to the wider public, and whilst it's as critical as ever that you have a full and complete understanding of what you're investing into, from my point of view, it's undoubtedly and exciting time for both new and experienced property investors.