Although I am a big fan of the crowd funding property investments offered by the likes of Property Partner, I think there are a couple advantages to REITS (Real Estate Investment Trusts) which mean you cant ignore them if you want to include property in your investments. REITs are more tax efficient and offer a route to investing in commercial property.
Firstly some background to REITs.
They are traded in much the same way as shares in any other PLC. By investing in a REIT you are essentially investing in a company that owns and manages lots of properties. As you are investing in a company and are still at the mercy of how well it is run; this could be a positive or negative so you need to research the company as you would for any other stock purchase. You have no control over the exact properties are bought or sold and you have to rely on the management to invest in good value property and keep it let out to get good returns.
You should work out from the company’s info pages what their niche and aims are. If you are interested in a particular section of the property market then look for a REIT that invests in those types of property. Some REITs on the London Stock Exchange hold property across Europe and some focus on particular sectors such as student lets.
REITs vs Crowd Funding
The main advantage is that REITs are designed to be tax efficient. Part of their dividend is free from tax which means even if you don’t hold them in an ISA you wont pay tax on all of income. Unless you still have money to invest after filling your ISA allowance then you are best to hold them in an ISA then none of the income would be taxable and neither to would any capital gains. So far, the crowd funding cant be done under an ISA. I do wonder if this might change one day as some peer to peer lending is now done under Innovative Finance ISAs.
Another key difference with REITs when compared to crowd funding is they invest in commercial property. Shopping centres and the like are such big and complex investments I doubt they will ever get offered on crowd funding websites. Therefore, REITs offer you a different sector of the property market and so help you to diversify. And if diversification is your thing then you could consider using an real estate ETF such as the IShares UK Property ETF which invests in a range of REITs. This would give you diversification and while you wont get huge returns you shouldn’t suffer as badly if one company fails.
Are there any downsides? Although well chosen REITs can be a good way to invest in property they do distance you more from the properties than if you invest directly on the crowd funding platforms. A bigger problem is that, due to the buying and selling fees, you would really want to invest much more than the minimum £50 allowed on Property Partner if you are investing in REITs. Although you could invest such small amounts, the cost of trading would become a large portion of your investment and thus diminish your returns.
So there we are, yet another simple property investment!
For anyone who wants to have property based investments REITs are definitely worth considering. They offer a tax efficient way to diversify your portfolio and are a much simpler way into property than becoming a traditional landlord.