Buying a Buy to Let, Property Funds or Fractional Ownership: Which is Best?

There are many ways to invest in property, aside from your standard buy-to-let model. There are a number of investment products that offer access to different sectors of the broader asset class that do not require you to actually buy the property, and allow you the investor to get in on the act without necessarily having get your hands dirty.

The question is, are they any good and can they replicate what you achieve when you actually buy the property? We will discuss the various options available, and whether they in fact achieve the end goal, being involved in the property market.

The main problem with buying a property is generally the costs associated with it’s purchase. You have legal fees, stamp duty and other associated costs that all impact on the cost of your investment, hence affecting the return you make. Also, when buying a typical buy-to-let most investors concentrate on residential property and do not venture into other types such as commercial where it may be possible to increase returns. Another issue with many investors, and a subject we have discussed before, is that many would-be landlords tend to purchase properties local to them, again restricting their investment choice. Finally, there is the running of the property and all that it entails, so investing in buy-to-let isn’t as simple as buying a property, sitting back and watching the money roll in, or could it be that simple?

Well the running of a property these days can be made a lot easier as many of the new style agents perform all tasks that a would-be landlord would have to normally worry about, and at a price that is not to punitive, typically around 8% of the total rent achieved. For this, all you have to do is sit back and watch the money hit your account monthly, or in many cases every 3 months. This means that the new landlord of today doesn’t need to live near the property and can look further afield, in most cases achieving greater returns.

What if you like property, but cannot be bothered with the aggravation of going through the buying process and maintenance? Well all this can be negated by investing in a property fund. Investors have to decide whether they want to invest in bricks and mortar funds, which own the buildings they invest in, or property share funds, which own the shares of companies that own the buildings. These funds can diversify their investment base and shift into the commercial sector where they can purchase land or property that is rented by companies.

One advantage of a property fund is unlike physical property, these property funds can be placed in ISA’s, or your pension, making them far more flexible and also tax efficient, giving them a large advantage over physical buy-to-let. Much like physical property though, those funds that invest in bricks and mortar are constrained by the fact that the property market is quite illiquid, meaning that selling or buying a property is not a quick process. Again, like a traditional buy-to-let investment transaction costs form a large part of a property funds business costs and can reduce returns considerably. An alternative to this is a property fund that invests in shares of companies that invest in the property market. They move like a traditional equity fund and are obviously far more liquid. These do not suffer the problem of redemptions that open-ended funds holding bricks and mortar do, if investors want their money back, they can simply sell the shares they own.

Property funds come in two forms, open ended fund or closed ended funds.

The main difference is open ended funds have an unlimited amount of shares in circulation and are issued as demand dictates by the fund itself, whereas in closed ended funds there are a fixed amount of shares in circulation that can only be purchased from other investors and not the fund itself.

The open ended fund is set up so that an investor can get in, and exit quickly. This means that the fund has to retain a large cash buffer to cover redemptions, and therefore does not fully invest all the clients money in the property itself. Like traditional buy-to-let, another issue for property funds can be valuations of the properties, this can be a worry to investors as a fund can revalue it’s portfolio at anytime, and given the subjective nature of property pricing this can lead to large fluctuations in the value of the assets, both up or down.

Many market participants say that open ended funds are not the best vehicle to take advantage of the property market, as a large proportion of the fund itself is not put to work. So despite many advantages, there are also many drawbacks with this form of investment.

Another method of owning property is through fractional ownership schemes. This method of ownership has in the past mainly been used for high cost tangible assets, where the parties involved wish to mitigate the risk of ownership and share the burden of costs or benefits with other parties. In property schemes it is often done with student or HMO type property, or indeed now the new care home fractional ownership. All of these schemes give you ownership and a title deed, but unlike normal buy-to-let investments, these tend to offer little in the way of capital growth. They are primarily very low cost, offering strong ROI, but exist in a market that is both less liquid than conventional markets and also one where participants’ budgets are smaller.

So how does this all stack up when wishing to invest in property? Well in general it would appear that although the aforementioned does offer slightly different advantages in their own right, none capture the full benefits derived from a traditional buy-to-let investment and as such are not the best way to take full advantage of that market, but should perhaps be used as away of diversifying your interest in property along side the property you own. Put simply, nothing beats owning the actual bricks and mortar, and as any investor will tell you the fact that you can actually touch a physical property and see where your money has gone is a very satisfying and empowering feeling.

For more information about Buy-to-let, or to find out more about our latest developments, call us today and speak to one of our property experts. Or why not read our 2018 Property Predictions Guide here here.

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