Property investments, not just for the rich anymore!
The world is changing, thanks to the recent technological advancements and the globalisation of markets, inclusive of properties. Nowadays, there are much quicker and safer entry routes to property investments. So, you can make your very own property portfolio, and yes, without requiring a large lump sum of money.
Let’s dive into the top 7 property investment hacks by which you can start building your own property portfolio. Especially, during these troubling times – COVID-19, BREXIT, climate change impacts – and as UK enters the deepest recession on record, this is the right time to act sensibly and plan for a safer future.
1. Invest with joint venture partners
Why wait and lose years to save a large fortune and buy property. You’ll lose the precious time which could have been used to your advantage.
Co-investing could save you years, making you a lot of money. It actually makes a lot of sense. Sharing a smaller percentage of the rewards through co-ownership, with a smaller initial outlay. You receive profit on capital growth and rental income from your property co-investments. Hence, it really opens the doors for you, many years earlier than waiting to do it all by yourself.
Finding partners for co-investing is not that difficult. You just have to make sure that you share mutual trust and mindset with your potential partner(s). For this very reason, it helps if the members of your property collective are friends and/or family members. Still, if you’re not able to find friends or family members who share your goals, consider looking for potential partners within your circle. For example, try asking your friends or family to recommend your idea to their friends. Chances are that the required person is only one or two knocks away. You can also post your idea on property investment discussion forums, Facebook or LinkedIn relevant groups and so on, and see who responds. Nowadays, you can find many groups on social media platforms formed around property investing and property development. You won’t know the kind of response you can get until you put your idea in front of them.
Additional benefits of co-investing include:
- saving you money.
- reducing the amount of money you will need to cover the purchase and holding costs.
- saves you time – as you can share the workload of investing and managing your property with others.
- manage your risk – you can build a more diversified property portfolio than you could on your own.
- reducing the effects of your own personal investment biases and can allow you to leverage other’s skills and knowledge to your advantage.
Beware, it does require a high level of trust to succeed in co-investing – as highlighted above. Either way, it is worth taking legal advice and ensuring strong legal agreements are put in place before co-investing, even if you trust the other parties completely. Life often throws curveballs so the legal agreements should cover different eventualities.
2. Buy real estate stocks
You can start investing in real estate via the stock market also. You basically buy shares in companies which are generating their income and value through property. An example is a property development company or a company that owns properties, acts as a landlord and generates income in the form of rent for you.
These companies are “asset-backed” – i.e. they own property which investors can see and feel, with a relatively stable value. The company can sell them if it needs additional cash, offering additional safety to the investors. If markets get turbulent and say, you had shares of atech company whose assets aren’t as tangible ( mobile app isn’t a physical asset), investors are more likely to be rattled and start selling, more immediately plummeting the company’s share value. Still, asthese property companies are listed on the stock exchange, of course, the value of their stocks will show volatility.
In an economic slump, however, it’s worth noting that you might be hit with a double whammy – e.g. the stocks have fallen more than the property prices in the market due to the correlation with the stock exchange.
3. Invest through REITs (or real estate investment trusts)
Another popular way to invest in property is through real estate investment trusts (or REITs). These were introduced in the UK in the start of 2007 to provide an easier way for people to invest in property – and many are listed on the stock market.
REITs typically own a large pool of commercial property, providing a decent level of diversification for investors. Also, at least 75% of profits must come from property rentals (as opposed to development), and they’re required to distribute 90% of their property rental income to investors as dividends. This makes it a reliable form of income (since tenants’ leases are often agreed for years ahead) making REITs an attractive investment.
Eventually, the types of properties a REIT possesses are key to finding out their investment performance. For example, SEGRO REIT focuses on warehouses – an important infrastructure asset for enhancing eCommerce operations, which have led to its growing earnings. On the other hand, over 50% of British Land’s income comes from retail tenants – and many of those in its monstrous malls are being frequented less and less by shoppers. So a concern worth watching out for!
You have two ways to invest in a REIT – investing in REITs for dividends or trading on their price movements on the stock market. It will depend on your personal preferences and strategy.
4. Buying via private funds
Investors who prefer to avoid the stock market might look to get involved in a private property fund. These pool together individual investors’ money to buy real estate, which is managed by a team. So similar to co-investing, but with key differences being:
- You don’t have to find the other investors
- The legal structure of the fund offers security from the get-go
- The number of investors is much higher
- The minimum investment is far higher
- The management of the fund, target properties and everything else really – is all done for you
The team charges investors a fee – and often a portion of any profit – for the privileges. These funds aren’t easily accessible to the ordinary investor. And as stated above, a large minimum amount of investment required means only the wealthiest of individuals can join.
Investors in property funds typically agree to having their money tied up for a set amount of time. So this option offers less “liquidity” than if they’d invested in, say, a publicly traded REIT, in which investors can buy and sell shares at will.
5. Invest through crowdfunding
Recent years have seen several upstart tech platforms to democratise access to property investing. So, if you actually want to own a fractional share of a property alongside others, then property crowdfunding is your way forward. It is when a group of people get together to buy a single property through a platform or company that offers it. So they each own a small share and enjoy its capital growth and rental income.
Usually, property crowdfunding refers to when an online platform (which often needs to comply with some form of regulation, e.g. in the UK, you need to be FCA registered or regulated) brings a large number of investors together and manages the whole investment process for them. So, if you got together with a few friends to each buy, say, 25% of a property (like in a joint venture outlined above), it is not crowdfunding.
There are huge benefits of crowdfunding. Minimum investment can be as little as £100 and is usually less than £1,000, depending on the platform. That’s worlds away from a direct buy-to-let investment, where you realistically need at least £100,000 to buy even at the lowest end of the market in a city (most likely excluding London unless you get a garage sized apartment somewhere). Crowdfunding opens property investments to those who do not have huge sums of money. Or perhaps those who do not have the time required to invest in property and then look for tenants. The majority of these new property investment platforms do offer a diverse set of risk appetites for investors. For example, they can let investors buy into individual properties if they are comfortable with the risk or allow investors to spread their money across many different properties, creating diversification.
It is worth considering that your money will be usually held for a minimum 3 to 5 years in such crowdfunding investment properties.
6. Peer-to-peer lending
In simple terms, peer-to-peer lending is the lending of money to another person (or company) without a bank getting involved in the middle. It enables investors or lenders to club together via a platform and loan cash to the borrower, often, secured by a property that the borrower owns.
Peer-to-peer lending is usually a short-term loan. You don’t own the property in any way. It’s clear to see why this is attractive. Normally you put your money in the bank, the bank gives you about 0.5% per year, if you’re lucky, lending it out to borrowers at a higher rate. Thus, without the bank taking a big slice in the middle, you get a higher rate of return directly from the borrower. It might sound risky at first, lending money directly to another person. What happens if they disappear or just simply don’t pay you back? In reality, you’ll spread your money across various different borrowers – so if one doesn’t repay you, you just lose a small amount (which essentially is what the platforms do to minimise their losses. Keep on reading).
More importantly, you need someone in the middle to bring both sides together and facilitate the process, take care of the legal process (as this is also often a regulated activity) and offer security so if the borrower doesn’t pay back, you will still not be affected. That’s where peer-to-peer platforms step in. The first one in the UK was Zopa, operating since 2005. Over the last few years, tens of new platforms have come into the market.
So P2P lending scores well as an option. It’s relatively safe and liquid. It offers a high rate of interest as compared to banks. Splitting money across many borrowers and using a respectable platform reduces the risk of a major loss to nearly negligible. You can quickly sell loans to get your money back, during normal market conditions.
You can think like a property investor. For example, keep part of your savings in P2P instead of your bank when saving for your next purchase or when you want fixed/known returns potentially for a shorter period. For example, as a business owner, you could put your end-of-year tax amount in peer-to-peer until you pay it. Just note, these P2P platforms also pay a higher rate if you lock-in your money for a longer period.
Nothing in this world is guaranteed. Every investment comes with some level of risk.. But this option allows decent returns with a relatively low level of risk. Some of the other options listed here are likely to offer much higher returns due to the higher risk – food for thought.
7. Invest in property loan notes
Another alternative investment vehicle to lending money (similar to peer-to-peer model explained above) are property loan notes. In it, you loan an amount to a company – property developer – or an individual for an attractive interest repayment.
Both large and smaller property developers find it a useful way to raise capital to get investors involved in development projects. A loan note is a simple financial instrument in the form of an IOU (I Owe You) from one party to another. Hence, it is a loan agreement which outlines the terms agreed between you (the lender) and the property developer (the borrower). In particular, the terms include the amount borrowed, the repayments (including the original loan and any interest applicable) and the period of time for each repayment.
Investing in other peoples developments seems to have a high potential for reward, but it comes with some risk. Loan notes are not regulated, so if the property developer becomes insolvent, you risk losing your capital.
Such risks, though, can be mitigated by:
- Choosing loan notes which are asset backed. This means that if the property developer defaults or goes bust, the assets guaranteed as collateral can be sold to pay back debts.
- Undertaking appropriate level of due-diligence on the property developer, their past successful projects and performance.
I know this is for those who already have a large sum in their pocket. But the list can’t be complete without a mention of the all too well known buy-to-let investments. Simply speaking, buy-to-let is the purchase of a domestic property with the intention to rent out – a.k.a. “buy-to-let”. So, you aim to make money in two different ways:
- growth in the property’s value, and
- rental income which exceeds any mortgage payments.
(FYI: a mortgage is a long-term loan secured from a bank against the property you want to buy.)
Buy-to-let can potentially be a great investment. Though not all investments are created equal. Individual property’s specifics matter a lot. Property prices in the last ten years have doubled in some locations. In others, they’ve reduced.
The area and location of a property matters immensely . So not just at a regional or city level, the actual location, its neighbourhood, local crime rates, access to amenities and transport links – all have huge implications on your investment’s success. With such a large geographical area to choose from, you will need a way of narrowing it down. Even, if the method is somewhat random and you‘ll never really be able to research every single aspect of the property and every single UK postcode, due care needs to be given to the selection process.. Just the research phase can take a long time. Then follows the physical due-diligence, valuation and inspection of the property as well.
Some pointers to help get started in narrowing down the buy-to-let investment options can include:
- Areas you can easily get to by train from where you live.
- Places where you’ve lived previously, so are familiar with.
- Places where you have friends or family living, through whom you can get an insight about the local neighbourhood (and would likely have some familiarity with it yourself).
- A location where someone else you know has already invested successfully.
- Areas where there are strong regeneration, growth or investment plans e.g.– a large-scale infrastructure project by the government..
- Locations with properties that have all the required fundamentals like:
- Access to local amenities such as shops/markets, restaurants, a gym.
- Have a high demand for rentals e.g. near to a factory, close to the city’s financial centre or a large company’s office building or university with limited housing supply.
- Great transport links e.g. a tube or train station within a few minutes of walking.
9. Flipping (a.k.a. buy-to-sell)
This one is also for those, who can at least buy a single property themselves. Flipping a property is simply buying it at one price and then selling it at a higher price. You find a property that is in need of renovation and is being offered at a reasonable price. Then you renovate it to make it a lot more attractive to potential buyers, allowing you to sell it at a higher price making a profit.
House flipping is a property investment strategy, which has been around for a long time now. It is often categorised under the buy-to-let umbrella. “Buy-to-sell” seems like a more relevant term, as it clearly indicates the intention. But I like “flipping” because… well, it sounds cool.
Flipping, however, may or may not involve refurbishing the property alone. The term “flipping” can also only apply to situations where you don’t do any work. For example finding good deals where a property is offered at a discount, so a price lower than its market price. You then hold it until you find a buyer offering a higher price.. I personally don’t differentiate between them, as every buy-to-sell scenario is different.
Flipping a property can make you a big lump of cash in one go. In contrast with buy-to-let (BTL), it might make a few hundred pounds in rent every month – compared to a big lump sum only years in the future if you sell (when the price has increased). And often buy-to-lets are held for a long period so the price gain and by extension the capital gains can be large resulting in a huge tax bill. So best do a bit of tax planning in such cases. However, with a flip, you make the whole lump sum in one go – in as little as a few months after buying the property in the first place (using up your annual capital gains tax allowances as you go along).
Still neither of these can be claimed to be clearly “better” than the other. It’s all a question of strategy, capital and time commitment and what’s important to you as the investor.
Real estate has stood the test of time. It has shown that it is a safe and reliable asset class to make a fortune. Successful people – the million and billion dollar club – all have some sort of a property portfolio. They recommend building one yourself, if you really want to enter the club one way or another.
You should be mindful to not expect to get rich overnight. As a general rule of thumb, get-rich-quick schemes are often a sham. Property investment, like any other investment or strategy to increase your wealth, requires time and patience to enjoy the fruit it bears in the end. It’s no secret that the value of land – and, by extension, property – in the UK (and globally) has increased significantly over time. After all, space is limited, and a growing population concentrated around certain points like a city or attractions or needs (just the way we humans are) translates into more demand for the same supply. Has this impacted positively on the market? Yes, UK property prices have risen by more than the UK stock market since 1989 if you allow for the rental returns alongside.
With COVID-19, BREXIT and an impending recession, it has never been more important to educate yourself. With job safety being the top priority in people’s minds, having more than one income source is crucial. Property is one of the safest investments which you can do. With the right education and choices, you can avoid any pitfalls helping you to thrive even during these difficult times.
It is never too late and with our top 7 easy ways to enter into property investments. You can also start investing for a safer future.
Of the above list, we at Zisk Properties specialise in and offer the following options:
- Investments from £100: sign up to our award winning platform
- Investments from £10,000: schedule a free call with one of our property experts
- Property Fund with higher entry points, restricted to smaller number of investors
- Helping you invest with your own joint venture (or co-investing) partners through our provided sub-fund (making the fund management secure and easy)
- Buy-to-let and buy-to-sell opportunities
- Loan Notes