Jasmine Birtles
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How to Invest in Real Estate Without Buying Property
Ruby Layram
18th Dec 2024
Real estate is widely considered to be a long-term investment, especially for younger investors who have time to reap the rewards of long-term appreciation and rental income.
The UK real estate market is worth notably more now than it was even just 10 years ago, which is why many people see it as a solid investment opportunity.
However, in the current market, investing in property is easier said than done.
Buying an investment property comes with the task of managing tenants, maintenance, and large upfront costs. This does not appeal to everyone.
But what if there is a possibility to still enjoy the benefits of investing in real estate without actually buying property? There are several ways to approach real estate investing that might be more aligned with certain lifestyles and financial goals.
In this guide, we will take a look at 3 ways to invest in real estate without buying property in the UK.
1.REITs
First up is REITs – or Real Estate Investment Trusts. These are probably the most well-known option for those wanting to dip their toes into real estate without the hassle of owning physical property.
Think of REITs as a mutual fund for real estate. Instead of owning properties, investors own shares in a company that manages income-producing real estate. This could be anything from flats to office buildings to shops.
The most appealing aspect of REITs is that they allow investors to invest in real estate in the same, straightforward way that one would buy a stock. Yet, REITs are subject to market volatility, and their performance depends on the management of the properties, which can impact returns.
They are also required to pay out a large lump of their taxable income to shareholders in the form of dividends, which means investors could potentially see a little income stream without having to chase tenants for rent or worry about property maintenance.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
2. Real Estate ETFs
Next on the list are Real Estate Exchange-Traded Funds (ETFs).
Real estate-focused ETFs can be considered as a basket of stocks that are all related to the real estate market. One of the upsides of real estate ETFs is that they can give investors exposure to a broad range of real estate investments, including REITs, without putting all their eggs in one basket.
By investing in a real estate-focused ETF, investors can potentially spread risk across different corners of the market, which is particularly useful during times of high volatility.
Plus, ETFs can be described as flexible; investors can buy and sell them like stocks, and they often come with relatively low fees. This makes them a suitable option for those looking for an easier way to get into real estate. There is also the option of REIT-themed ETFs that provide an easy way to gain exposure to real estate income without the need to pick individual REIT stocks, further streamlining the investment process. A
lthough ETFs can spread risk, they may not always perform as well during market downturns or high volatility.
3. Real Estate Stocks
For investors that prefer to pick and choose investments, real estate-themed stocks might be the best property alternative.
These are shares in companies that are involved in the real estate industry. There are several types of companies that investors could invest in to gain exposure to the real estate market.
Construction Companies
These are companies that build the homes, offices, and commercial spaces that drive the industry.
Some examples of companies that are listed on the London Stock Exchange include Balfour Beatty, Keller Group, and Marshalls.
As demand for real estate grows, so does the potential for these companies to thrive. Besides, they often benefit from government contracts and large infrastructure projects, which can add stability to the investment.
Real Estate Agencies
Real estate agencies are the companies that help people buy and sell properties. These companies make money from commissions on property sales, and in a booming market, their revenues can soar.
Some popular examples include Savills and Hamptons. Companies such as RightMove are also interesting ones to consider.
The benefit of investing in real estate agencies can be that their success is often tied to the overall health of the property market, with the possibility of giving investors direct exposure to its growth.
Property Development Companies
These are companies that acquire land, develop properties, and sell them for a profit.
They’re at the heart of the real estate industry while they can be more volatile. It is wise to select companies with which returns can be potentially substantial. Some examples of these companies include Godwin Group, Acorn Property Invest, and Landhaven.
Please take into account that stock prices can be influenced by company performance, economic conditions, or market shifts, and real estate stocks, especially in development, can be volatile and impacted by regulatory changes.
What Are the Benefits of These Alternative Real Estate Investments?
So, why might someone choose to invest in the above real estate investments instead of buying property?
No mortgage
One of the biggest barriers to property ownership in the UK is getting a mortgage. The idea of being tied to a loan for 20 or 30 years can be discouraging for many.
With alternative real estate investments, there is no need for a mortgage, so you can invest without needing to fork out your life savings. However, while avoiding a mortgage can be appealing, alternative real estate investments may come with other costs or limitations, such as lower liquidity or reliance on market performance.
No ongoing maintenance costs
Owning property is not just about buying it; there is also a need to maintain it. This can include anything from fixing a broken boiler to dealing with pest control. With REITs, ETFs, and stocks, there is no need to worry about any of this.
The companies you invest in handle all the maintenance, leaving you free to enjoy the returns passively.
Yet, it is worth noting that alternative real estate methods, such as REITs and real estate-themed ETFs, come with management fees.
Diversification
Investing in property directly often means putting a large part of money into one asset. If the market in that area takes a hit, so can that investment.
With alternative investments, investors could spread their risk across different types of assets, which is a smart way to build a diversified portfolio.
Lower buying and selling fees
Buying and selling property can be expensive. There are agent fees, legal fees, and sometimes even taxes to consider.
Alternative real estate investments typically have much lower transaction costs, which means more of your money goes into the investment itself, rather than getting eaten up by fees. However, as mentioned before, some alternative investments may have costs such as management fees.
The Risks of Alternative Real Estate Investments
Although alternative, such as passive, investments in property market has its merits, it comes with a certain amount of risks. As with all investment methods, the alternative real estate options carry a risk of capital loss. The value of the investments and the income received from them can fall as well as rise. There is a change of not getting the amount invested.
There are more risks to think about before making alternative real estate investments.
- The property market is volatile: Just like any asset, the price of property can rise and fall in relatively short periods of time. There is no guarantee that an investment will maintain its value over time.
- Liquidity risk: Even though alternative property investments are typically more liquid than traditional property, it still may be difficult to sell investments when the time comes. In particular, trusts and funds may come with high management fees that could eat into any potential profits.
- Investors not owning the underlying property: Investing in assets such as Real Estate ETFs means that investors do not own the underlying property. The provides less freedom around how the investment is managed.
Furthermore, it is also worth considering these risks, such as economic, political or other conditions that could have a negative effect on sectors, including real estate.
How to Invest in Real Estate ETFs (Step-by-Step)
Out of the three options that we have mentioned above, ETFs can be described as a relatively simpler real estate investment option to consider. Here is how to invest in real estate ETFs.
Step 1: Create a brokerage account
First things first, investors need a brokerage account to buy ETFs. Luckily, there are plenty of online brokers to choose from.
Look for one that offers a good selection of ETFs and has low fees.
Step 2: Fund your account
Once the account is set up, investors will need to fund it. This can be done by linking a bank account and transferring the amount they are comfortable investing.
It is worth remembering to only invest money that could be afforded to lose. A good idea is to start with the minimum deposit.
Step 3: Research real estate ETF options
Take a look at different real estate-themed ETFs and see what they offer. Some might focus on residential real estate, while others might invest in commercial properties or a mix of both.
Step 4: Ask a financial expert for some pointers
If you are new to investing, it is always a good idea to seek advice from a financial expert. They can help you understand the risks and make informed decisions.
Some of the best brokerages offer free expert insight and help, which can be an way to feel more confident about your final decision.
Step 5: Invest in an ETF
Once you have done your research and feel confident, go ahead and invest in your chosen ETF. You can usually do this directly through your brokerage account. However, please be aware of the risks involved.
By investing in real estate, you are exposed to a single sector, which can amplify the impact of sector-specific challenges, such as market downturns, shifts in demand for property types, or disruptions in the construction and leasing industries. Furthermore, economic or political challenges or high interest rates may significantly affect returns.
Investing in real estate without buying property can be an option for those who want to diversify their portfolio without the challenges of property ownership.
Whether you choose REITs, ETFs, or real estate stocks, these options provide an accessible way to benefit from the real estate market’s potential. With lower costs, reduced risk, and the potential for passive income, alternative real estate investments are worth considering as part of a well-rounded investment strategy.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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