Real estate

Traditional buying

Buying a property that you live in is an investment, since you benefit from any increase in the property’s value over time. But you can’t live in more than one place at once. Let’s turn our attention for a moment to buying a domestic property that you intend to rent out – a.k.a. “buy-to-let”.

With such an investment, you aim to make money in two different ways: through growth in the property’s value 📈, and through rental income 💰 that exceeds any mortgage payments.

Benefits:

One of the key benefits of investing in property via buy-to-let is control. As the owner, you decide the fate of your investment: if and when to sell, how much rent to charge, and what shade to paint the front door. 🚪

You’re also generating rental income over time – and if you have long-term tenants, it’s a relatively stable source of income (one of the reasons buy-to-let is very popular among retirees). And, of course, if your property increases in value, you stand to make substantial gains if you choose to sell. 🤑

Drawbacks:

The large deposit often needed to buy a house or apartment can, of course, be off-putting. With buy-to-let purchases, the typical deposit required is 25% of the property’s price. However, this may vary depending on the country 🌎 and market conditions.

An average property in London, for example, would require a £118,000 deposit – too pricey for the average Brit, especially if you’re paying a mortgage to keep a roof over your own head. And then there’s stamp duty to consider…

Once you get through the research and expense of a property purchase, conclude negotiations with the seller, and sign off on the paperwork with the lawyers, there’s also the ongoing time ⏰ commitment of managing your tenants and their demands. You can do this yourself, or pay a property management firm to handle it for you – in which case you forfeit control, as well as some of your rental income.

That might be a bigger bone of contention than it once was, thanks to often tax changes which may increase some landlords’ rental-related tax bills. There are chances investors will be making less profit than originally planned when buying a buy-to-rent property – and some might actually be losing money overall. 😱

Buying via the stock market

One popular way to invest in property is through real estate funds and ETFs, which is always an easier way 🏝️ for people to invest in direct property or real estate companies – and are listed on the stock market.

Real Estate ETFs typically own large portfolios of commercial or residential 🏡 property, or real estate companies, providing investors with some diversification. But ultimately, the types of properties and companies they own are key to their performance as an investment.

For example, the iShares Developed Markets Property Yield UCITS ETF, is available through your Wealthyhood account and tracks the performance of more than 300 real estate companies active in developed markets around the world.

Another example is the real estate investment trust (similar to an ETF, but with additional requirements) SEGRO, which focuses on properties like warehouses – vital infrastructure for booming e-commerce operations, which have led to it growing earnings in recent years. On the other hand, over 50% of British Land’s income comes from retail tenants – and many of those in its monster malls are being frequented less and less by shoppers.

As the name suggests, real estate ETFs are freely traded in the stock market, which means their price is defined by the supply and demand at any given time. However, the fact that they are investing in direct property or asset-backed companies, often makes them less subject to sharp movements. 💪🏼

Some real estate ETFs pay out periodical dividends (distributing ETFs). This relatively reliable form of income (since tenants’ leases are often agreed for years ahead) could make distributing real estate ETFs an investment worth considering for investors aiming for a source of passive income.

Others automatically reinvest any income generated by their underlying assets (accumulating ETFs) and are more popular with investors aiming at capital appreciation. 📈

Buying via private funds

Investors who prefer to avoid the stock market might look to get involved in a private property fund. These funds pool together individual investors’ money to buy real estate, managed by a team which charges investors a fee – and often a share of any profit – for the privilege.

Such funds aren’t very accessible to the average investor, with large minimum amounts required precluding all but the wealthiest of individuals from participating. 🧐

Investors in property funds typically agree to have their money tied up for a set amount of time – so this option offers less “liquidity” than if they’d invested in, say, a property ETF, in which investors can buy and sell shares at will.

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Keep in mind that when you invest, your capital is at risk. This learning guide and the examples mentioned are for information purposes only and are not investment advice.