A beginner’s guide to investing in property

Property investment funds are a simple way to gain exposure to bricks and mortar, but rental properties and property development could be alternatives if your finances allow. Read on to learn how you could invest in property, and which option might be right for you.

Tim Leonard Published on 22 July 2021.
A beginner’s guide to investing in property

Property is something of an obsession on these shores – house prices are talked about almost as much as the weather, while many regard homeownership as the holy grail of financial security. But what if owning your own home isn’t enough, and you want to invest in property as well?

How to start investing in property

There are a few different ways to invest in property – buying a physical property is one, either with a view to becoming a landlord, or ‘doing up’ the property to sell on for a profit. The potential sticking point here is that you’ll usually need substantial funds to buy an investment property, even if you intend to raise finance to help cover your purchase.

The more affordable alternative for those wanting to invest in property is a property investment fund. Property funds aim to deliver returns by pooling the money of its investors together to buy property or invest in the shares of property firms. Minimum investment limits on property funds are generally low enough to make them an option for most casual investors.

You’ll also usually be able to withdraw your money from a property investment fund at relatively short notice, particularly when compared with the time it generally takes to realise funds if you must sell a physical property that you own as an investment.

How to invest in property without buying a house

Property funds can usually be held tax-efficiently within a stocks and shares ISA or as standalone funds outside of a wrapper. You could also invest in property funds via your pension.

Invest in a property fund and your money will be in the hands of fund managers. You’ll pay a fee for their expertise, and decisions over the properties in which the fund invests will rest with them. Crucially, property funds are a form of investment, which means there are no guarantees of investment growth or that you will receive all of your original investment back.

Property funds usually invest in commercial property, such as offices and retail parks, but some invest in residential properties. What fund managers will be looking for are attractive property valuation and rental income opportunities.

But regardless of where a property fund invests, you need to be aware that investment funds can be structured in different ways:

Open-ended funds

With an open-ended fund, such as a unit trust or OEIC (open-ended investment company), your investment goes towards buying units in the fund. Units will be created and the size of the fund grows when you invest; similarly, units will be cancelled and it will shrink when you exit. Whether your investment rises or falls in value depends on the ‘net asset value’ of the assets held by the fund, which are evaluated daily.

At various times in recent years, open-ended property funds have received bad press when investors were temporarily trapped in property funds and unable to withdraw their funds. Such problems have occurred when a significant number of investors have wanted to leave a property fund at the same time, and difficulties in valuing and selling properties held in the fund at short notice meant fund managers couldn’t raise the cash required to pay investors back. Many funds were temporarily suspended for this reason after the Brexit vote in 2016, and also when the coronavirus pandemic took hold in March 2020.

REITs (real estate investment trusts)

A real estate investment trust, or REIT, is another structure that a property fund might adopt. Investment trusts are closed-ended funds, which means a set number of shares are issued when it is launched. If you want to invest in a REIT, these shares can be bought and sold on the stock market, at a price reflective of investor demand and supply for them.

Importantly, as units are neither created when someone wants to invest in a REIT nor cancelled when they leave, there is only ever a predetermined amount of shares. In turn, this means that there is no pressure to sell assets quickly and raise funds if investors wish to withdraw, as might happen with an open-ended fund. REITs may also be more tax-efficient than other forms of property investment because of the taxation applied to profits generated by REITs both internally and in the hands of the investor.

Invest in the shares of a property company

Investing in property company shares is another way to gain exposure to property without directly buying one. Property companies to consider may include house builders and developers, or property management companies that own and rent out homes, flats or business premises.

However, as the risks associated with holding individual company shares can be high, it’s crucial to carefully research any company you’re contemplating buying shares in.

» MORE: Learn about buying shares

How to invest by buying property

If you have sufficient capital and want to invest by buying physical bricks and mortar rather than investing in an investment fund, there are different ways that this can be approached too. Some buy with a view to becoming a landlord, while others have property development in mind.

Whichever route you take, you’ll usually need substantial funds to buy the property outright, or be in a position to secure the necessary finance to cover your purchase. Then you’ll need more money to set up as a landlord and get the house ready for tenants, or to push ahead with the refurbishment. Time and effort will also be required if you plan to do the renovation work yourself, and in the ongoing management of the property if you want to rent it out.

How to flip a house

The hands-on way to make money in property is to buy a house or flat that needs renovating, quickly do it up to add value, and then sell it on for a profit – a process that is sometimes referred to as flipping.

If you don’t have all the funds available to buy the property and refurbish it, you’ll need to work out how to finance your renovation. Keeping on top of your renovation costs is also key, and if you have the skills to do a lot of the work yourself, this could help. At some point, however, you’ll probably need to get other tradespeople involved, and this is where your project management will come to the fore.

Be warned that flipping a house doesn’t come without risk. You could easily run over budget if an unexpected problem presents itself – an in-depth house survey and careful assessment of the work required can help reduce the risk of this happening, but some things just can’t be planned for.

If you’re going to achieve the price you have in mind for the completed project, you’ll also need to be confident that the property market is on the up. Should prices fall, your profit margin could be wiped out and you could even end up losing money overall.

» COMPARE: Property development finance

Investing in rental property

Becoming a landlord appeals because a buy-to-let investment has the potential to deliver an income straight into your bank account via rent, and the house or flat could rise in value at the same time.

It might sound like a win-win situation, but there’s still plenty to think about, particularly if you need to get a buy-to-let mortgage to fund your investment. There may be times when you can’t find tenants and the mortgage payments still need to be made, and property values can fall as well as rise. Some recent changes to how landlords are taxed, a letting agent fee ban, and the introduction of a stamp duty surcharge for buy-to-let properties have also seen many landlords turn their backs on the sector in recent years.

Doing the sums for yourself is vital and be aware of the risks and hard work that might be involved too. However, if you do this, becoming a landlord could still prove a viable way to invest in property.

» COMPARE: Buy-to-let mortgages

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

Image source: Getty Images

About the author:

Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more

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