A Guide To Investing In Property.
However unpredictable the economy, property continues to remain a sound investment.
Over the last four years, average house prices have risen by 23%. Average monthly rents tell a similar story – rising nationally from £889 in 2015 to £953 at the end of last year. And with some areas experiencing a boom in rental rates over the same period, it seems that investing in bricks and mortar really can be as safe as houses.
So, if you’re contemplating ways to invest in property, here’s a brief guide to some of the options available.
Property bonds are essentially loans made by investors to property companies or housebuilders looking to raise funds. Capital is typically secured by a legal charge against the borrower’s Holding company’s assets – minimising risk.
To buy a bond you’ll need to fall into one of three categories: certified high net worth investors; certified sophisticated investors, or self-certified sophisticated investors.
You will receive interest at fixed intervals over a set number of years with the initial loan being returned at the end.
Property bonds are ideal if you’re an investor who wants a foothold in the property market but from a distance; bonds are also a valuable asset when it comes to portfolio diversification. Some pros and cons include:
✔Invest in property without direct ownership – no need to manage or maintain a buy-to-let or buy-to-sell.
✔Few barriers to entry – minimum stake required but will be significantly lower than buying property.
✔Asset-backed security which mitigates financial risk.
✔Predictable returns through fixed interest rates.
✔Returns can be higher than funds that depend on market performance or asset value.
❌Bonds are not regulated by the FCA and you won’t be able to claim compensation through the FSCS.
❌Depending on the product, capital can be tied up from one up to ten years.
Buy-to-let is an obvious way of investing in property. But recent changes to interest cost tax relief and the introduction of energy efficiency rules lowers net returns and makes this increasingly like a long-term strategy for large corporate landlords.
For investors with modest portfolios who are managing properties themselves, buy-to-let can be fraught with complications. In short, it’s hands-on and hard work – here are some pros and cons:
✔Good long-term rewards as value will typically increase.
✔Predictable income while the property is rented.
✔Limited risk to capital.
❌Needs large capital investment.
❌Buy-to-let mortgages often have strict eligibility criteria. Fees and interest rates can also be higher than standard mortgages.
❌Can be time consuming if you manage the property yourself while hiring a managing agent will eat into your profits.
❌From April 2020, you won’t be able to claim relief on your mortgage interest (you’ll only receive a 20% tax credit).
❌Changes in regulations means landlords have more responsibility to ensure rentals meet certain health and safety and environmental standards – for example, gas safety checks and ensuring a minimum EPC of grade E.
❌Section 21 eviction notices could be abolished despite landlord protests, making it harder to evict problem tenants.
❌Rogue tenants and rent arrears can seriously impact on rental returns.
❌Unpredictable maintenance costs.
Also known as ‘property flipping’, the financial rewards can be considerable if your timing and (more importantly) if your investment choice is right.
Success often depends on the property you buy and how quickly you can bring it to market. For example, auctioned property in a poor state of repair might represent terrific value for money but unless you have a dedicated team or the skills yourself, it could cost you thousands of pounds in time and resources to make it habitable and crucially – desirable.
Alternatively, buying and reselling a new build avoids the need for renovation but brings a different set of uncertainties but fundamentally relies on rising property prices. For example, the sale of property could be hampered by local market conditions or specific characteristics of the build – such as proximity to amenities.
Ultimately, buying to sell, suits time-rich investors. Pros and cons include:
✔Can earn significant sums of money in a short period of time.
✔No ongoing management or maintenance needed.
❌A number of barriers to success and can depend on location, quality of housebuilder and if buying off plan, whether the property is completed on time and to a high spec.
❌Can become a liability if renovation timelines aren’t adhered to, resulting in missed sales opportunity.
❌Projects are a one-off so there is no continual income.
❌Can be very time consuming, renovations could also reveal issues not originally accounted for in any initial budget.
❌No guarantee that property will sell for a profit.
❌Property downturns can cause significant loss of capital.
Investors buy into funds which trade, finance or manage property – returns are secured through profit made by the fund.
Close-ended funds limit the amount of stock there is to buy, making it similar to buying equity in a firm. Examples of close-ended funds include Real Estate Investment Trusts (or REITs as they’re more commonly known). Alternatively, open-ended funds increase or decrease the amount of stock (or units) available based on investor demand.
Funds can invest in both residential and commercial property, so success often depends on overall economic and market conditions according to where investments are made. Pros and cons include:
✔Hassle-free for investors who don’t have the time or desire to manage their own property portfolio.
✔Funds that concentrate on commercial property can benefit from long leases which could lead to predictable returns.
✔Open-ended funds offer more liquidity than other types of property assets as stock can be sold quickly.
❌Returns can vary considerably depending on how the fund is managed so you’ll need to do your homework which can be time consuming and remember – past performance is no guarantee of ongoing or future success.
❌Returns are generally quite modest.
❌Dividends depend on the relevant market so your investments will be directly affected by economic or property slumps.
❌Not all funds are regulated by the Financial Conduct Authority (FCA), so you’ll have little redress and won’t be compensated by the Financial Services Compensation Scheme (FSCS).
❌You may have to pay fees which will cut into returns.
Investing for the future with Acorn property bonds
At Acorn, we do more than just issue property bonds – as a bespoke, award winning housebuilder of choice, we’re investing in communities.
Secured by legal charge and backed by our corporate guarantee for peace of mind, you can choose from four competitive fixed income bonds offering up to 10% annual compound interest.
With more than £1.1 billion of pipeline development, we’re continually striving to empower homeowners by building homes that are both desirable and practical.
You can find out more about Acorn property bonds from our FAQs page or contact us by completing this form.
Alternatively, you can apply to be an investor online.