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If buy-to-let is no longer worth it, what other options do you have as a property investor?
Traditionally, buying property to let out has been the smaller investor’s favourite way to invest in the residential property market here in the UK.
This really took off in the 1990s with rising property values, a greater spread of disposable wealth and low interest rates. Labelled `buy-to-let’, it seemed an unbeatable investment proposition, providing not only regular income, but also healthy capital gains on the back of rising house prices, which also ensured buoyant demand for rented accommodation from those who couldn’t afford to buy.
It was too good to last, of course, and now the golden age of buy-to-let looks to be over. Like so many things, it fell victim to its own success. The government concluded it was distorting the housing market, making it even harder for first time buyers to get on the ladder. So, it made life harder – and less lucrative - for buy-to-let investors, who were hit with a triple whammy of a stamp duty hike, restricted tax relief on interest payments and tighter regulation on mortgages.
In a 2017 report, property expert Savills argues that not only have these measures already led to a steep fall in those buying investment properties with mortgages, but that the decline is far from over.
So where are property investors turning?
The residential property market, however, is still booming and Savills also forecasts an annual compound growth rate in UK house prices of more than 14% over five years.
Property undoubtedly still has all of the traits of being a good investment, but how can the smaller investor now get a share of it?
You might consider putting your money into a property fund, which is a managed fund that invests into a range of property-based projects or conversely, into property development companies.
Very much a passive way of investing, the approach spares you all the hassle of maintaining a property and worrying about tenants. It's about investing into the market as a whole than into a specific property, and so whilst you may not be as hands on as with buy-to-let, your risk level can be greatly reduced in comparison as you're not relying on returns from a single property.
Although some residential property funds do exist, at present the majority focus on offices and retail space where rental yield tends to be higher, but it is important to remember that you will miss out on the capital gains available in traditional buy-to-let.
Property investment trusts
Similarly, you could buy shares in a Real Estate Investment Trust (REIT). As with property funds, you are not buying any properties directly, and your investment is in a large and – hopefully - well-diversified portfolio, therefore reducing your risk.
Being limited companies, this means REITS are immune from many of the tax changes on residential lettings and targeting the kind of returns that are available with other equity investments - and as with most shareholdings, they are best held for the long term.
An increasingly popular alternative form of buy-to-let - particularly since the prolificness of companies such as AirBnB has rocketed- you're essentially letting to a number of holidaymakers for one or two weeks each instead of to longer-term tenants. In high demand locations, holiday lets can bring much higher income than regular buy-to-lets, but the purchase price of the property is likely to be correspondingly higher.
Very much a hands-on form of investment for most, you have to actively market the property to ensure a steady supply of short-term tenants, you need to ensure the property is cleaned between each set of guests and you have to ensure provision for maintenance and repair – often at short notice.
Social housing investment through a Real Estate Annuity Plan (REAP) helps provide housing for those on low incomes. It involves lending to a specialist company that buys and renovates derelict properties in order to let them out at affordable rents to tenants on low income. You receive a fixed monthly income in return for your investment over a five year period.
Importantly, your money will be invested in a single property which does increase risk exposure, but the investment - generally at least £15,000 - can bring a return of up to 7% annually.
Arguably the most popular option in terms of awareness at least is the process of buying to sell yourself. Acquire a plot of land and build a house - or houses - on it, or buy an existing property to which you can add value through refurbishment, and then sell for a capital gain.
The returns can be excellent and many people have done well out of this kind of direct property investment over the years. However, they are almost always people with experience of, and/or contacts in, the construction industry.
Unless you have the necessary skills and knowledge yourself, or know people who do, you will be placing yourself and your capital in the hands of contractors. What’s more, without the experience, your money could be tied up for far longer than you anticipated while you still have to meet ongoing expenses, which could well be far higher than you thought.
It’s undoubtedly an option that has the potential to produce attractive profits, but it’s definitely not for the inexperienced or faint-hearted.
Co-investing into property
In the wake of the financial crash, independent builders found it hard to borrow from traditional channels such as the banks.
This sparked the development of alternative ways of property investing. Online platforms allow large numbers of investors to invest together, either through peer-to-peer lending or crowdfunding. With a refinement of crowdfunding being co-investment, this produces the opportunity for ordinary investors to invest alongside professionals such as institutions and growth funds.
These platforms are now being used more frequently to fund property developments, often through a Joint Venture Agreement (JVA). This is a temporary but formalised partnership of builders, finance houses and developers, whilst a Special Purpose Vehicle (SPV) is a temporary subsidiary company, created under the JVA, in which the investors buy shares. As a limited company, the money invested in the SPA can only be used on a specific development.
The risks are reduced, but good returns are still possible. If the houses sell for more than was projected, the return for investors could be higher than forecast, because the cash returned to investors is a percentage of the profit achieved equal to the proportion of equity held. In other words, if an investor holds 10% of the shares in the SPV, they will be entitled to 10% of the profit, whilst potential losses are limited to the amount invested.
This approach allows the investor to share in the many potential benefits of the property market. They can be part of their own bricks and mortar development, but with the comfort of investing alongside property and investment experts. There’s still the security of having an asset-backed investment and the time frames for a return – typically 18 months to two years – are short, relative to the possible returns.
What’s more, as little as £1,000 can be invested in a single project, allowing the investors to spread their capital among a number of developments and so mitigate their risk even further.
Investing in property away from buy-to-let
There is little doubt that buy-to-let has been one of the most notable ways to invest in property for decades, but the numerous changes the industry has seen in recent times have made it less and less appealing.
With property still one of the most popular assets for investors to hold, the most important point to remember is buy-to-let isn’t, wasn’t and never has been the only option, or necessarily the best option. The options here are by no means exhaustive, buy show that if you’re an investor interested in property today, the options open to you are indeed vast and varied - arguably more so than they ever have been.