Hello friends, welcome back to the Bulletproof Blog, I hope you are having a fabulous week!
Today I will be sharing how you can become a real estate investor with very little money. Even if money is not your problem (lucky you), property investing can be a stressful business. But in this post I will be sharing in detail how you can invest in the property market without hassle especially in the UK.
The cost of going the normal route
You can become a real estate mogul simply by investing in property. The normal route is to buy a property and become a landlord.
You can do this by saving up, putting down a deposit on a property, buying it, and getting rental income. The property value grows simultaneously; which means you get to continue building wealth.
This process comes with a lot of hassles like tenant management. You also have to go through all the hoops put in place by the UK government designed to make sure you are treating your tenant right and paying the right amount of tax.
The tax has grown over the years, and it is quite high for high-income earners. You have to pay tax on your rental income even before paying the mortgage on that property. This eats into the profit for a lot of landlords in the UK.
There are a lot of rules around HMOs and what you can do with the property, how to relate with tenants, what you need to do annually, required maintenance, and a lot more which can be very discouraging.
Also, to become a landlord, you need a decent amount of money; or instance, to buy a property worth £100000, you need to make at least a 20% deposit which is about £20,000. This has become a barrier for many people aiming to grow wealth in the property space.
The Big Secret
As a result of these hassles, many people have stayed away from the real estate market as a means of growing wealth.
However, I have a secret to share with you. You can invest in real estate without directly buying property or dealing with tenant stress. You can avoid the hassle associated with going through the normal route.
All you need to do is invest, sit back and grow wealth in the real estate industry without stress.
How then can you do this?
You can invest in the real estate market through REITs.
A REIT (Real Estate Investment Trust) is a company that has been set up for the specific purpose of investing in property.
The good thing about REITs is that they are traded on the stock exchange like other companies you would usually invest in.
This means you can invest in them just as you can invest in technology, food, automobile, and telecommunication companies. You can invest as low as £1000, £2000, or £5000; you do not have to wait for a large deposit to get into that market.
Simply put, once you invest in a REIT, you are invested in whatever that REIT is invested in.
How REITs works
REITs were introduced in the UK in 2007, and since then, most of the UK’s largest property companies have converted into REITs. This allows you to invest in them and become property investors and names like British land and land security have been in existence since then.
To qualify as a REIT, at least 75% of the profits from the company must come from property rental, and 75% of the company’s assets must be involved in the rental business. REITs are also required to pay out 90% of their rental income to their investor.
They buy property on your behalf and pay you rental income. You do not have to do any rental work (sourcing for or managing tenants).
These companies do everything for you; they are responsible for all the heavy lifting while still having to return 90% of their rental income to you. That is the benefit of you investing in REITs.
REITs are the best way to invest in the property market without buying and managing the property. You get to be a real estate investor without saving up a deposit, searching for property, doing repair work, or having to manage tenants.
None of these is your concern when you invest in REITs. All you have to do is buy the shares of the REITs the same way you will buy that of any other company on the stock exchange.
Zero Corporations or Capital Gains Tax
The regulations required of REIT are strict (the 75% requirement for rental, 90% payout to investors, and so on), and they have to abide by these regulations. In exchange for obeying these relatively strict rules and encouraging investments in the UK real estate sector, REITs do not pay corporation or capital gains tax.
This means you are not paying corporations or capital gains tax on your property investment you only invest and collect all the benefits.
With this special tax arrangement, dividends are only assessed once for tax when they get to you. So, the REITs are not paying these taxes, and you get your money straight up.
Stable rental income
Once you invest in the property market through the REIT, you are likely to experience steady income because their tenants are long term and the rental income is stable.
In addition to that, some REITs can enforce regular rent reviews on their tenant, which means that you as an investor can also enjoy a steady income.
How do you evaluate REITs?
REITs’ return to investors comes in two parts: dividends and change in net asset value. You get paid dividends because of profit and revenue, while the changes in net asset value are a result of your property increasing in value.
Net asset value represents the value of the asset owned by the REIT. Also, if your REIT is invested in a sector or a popular area, demand might push the share price up; the share price can rise above the asset value as well. The same process in reverse might mean that the value of your REIT is pushed down to a discount.
Nevertheless, REITs are a great opportunity to grow wealth in the property sector without hassle. REITs with a long track record of growing net asset value per share often trade at a greater premium and are worth extra attention from investors.
As a general rule though, REITs’ share prices are tended to move in line with the net asset value, so the more your property or asset increases in value, the more the actual price also increases in value.
Since REITs have to pay out most of their income to investors, it is hard to build up enough capital to reinvest in new property from their profit. For companies looking to expand, that leaves two means of funding their growth: selling new shares or taking on debt.
The level of debt in REITs is something you as an investor should keep a close eye on. REITs debts are usually measured with the net asset value through the loan-to-value ratio (the proportion of the property portfolio funded by borrowing).
A higher ratio means more leverage. If the company has more ownership of the property, then they have more leverage. Using debts can stop the investors from stocking up more cash or risk being diluted as they would be if the company chooses to see new shares.
However, it does bring an extra level of risk. Because property prices are cyclical, property values can change very quickly. That is why it is better to invest in property via a REIT than do it yourself.
A REIT with a high level of debt can quickly find itself in trouble as the loan-to-value ratio shoots up, especially if a downtown also hits rental income. It can reduce its ability to service or pay its debts.
There are over fifty REITs listed on the stock exchange, and you should watch out for the next post, where I will share a comprehensive list of the REITs you can invest in. This way, you get to build wealth by investing in real estate without buying property.
Till next time.