Buy to let has many attractions as a way to invest in property. In recent years, however, increasing regulation and the tax burden together with rising property prices have led some investors to question whether buy to let is really right for them. Fortunately there are many other ways to invest in property that don’t involve buy to let, and we will consider some of them here.
Property renovation and development
Long before buy to let became possible – before assured shorthold tenancies were introduced and easy mortgage finance became available – property renovation and development was the main type of investment available to private property investors. But property renovation and development endures and is as (or more) attractive as an investment today.
The main drawback of property renovation and development is that the capital input tends to be high. It is also generally much more ‘hands on’ than buy to let. It’s usually necessary to have (or be able to source) building and project management skills.
Right now so-called BRRR or buy refurbish refinance and rent projects are something that disenchanted buy to let investors might particularly want to take a look at. BRRR enables investors to benefit from leverage, add value to an investment and potentially benefit from enhanced rental yields too.
Investing in land
Land is a property investment that is often overlooked. It is something of a sure-but-steady asset class. In the good times land values tend to rise steadily rather than boom. In the not-so-good times land tends to hold its value well and doesn’t crash spectacularly like some other assets.
It is possible to invest in land with a view to developing it, to use or let it for agriculture, to exploit mineral rights or just to hold for the long term.
Here’s an article which looks at What You Need To Know About Investing In Land.
Property stocks and shares
There are many types of stocks and shares that enable investors to invest in the property sector without actually buying property – for example house builders, construction materials suppliers and even estate agencies.
Property stocks and shares allow investors to invest a much smaller amount into property than buying a property would involve – from as little as a few hundred pounds. There can also be tax advantages, such as the ability to hold shares in an ISA.
Analysis by Brewin Dolphin suggests that £100 invested in the wider stock market in 1986 would have accumulated a total of £1,755 to date. While £100 invested in a buy to let property would have produced a return of £739 or ‘just’ 639%.
Property stocks and shares tend to be more volatile than the property market itself however. The scope for making a large, quick profit needs to be considered alongside the risk of making a large, quick loss. Investing in individual shares successfully calls for some skills and dedication in following the market and deciding when to buy, hold or sell.
As well as investing directly into shares it’s possible to invest indirectly through some kind of property fund such as a REIT or real estate investment trust. (Open ended property funds have had a tough time during the Covid pandemic however.)
Property bonds are issued by companies like housebuilders and developers to finance their projects and are a little like corporate bonds or perhaps a private mortgage. The investor loans money to the housebuilder or developer for a fixed period of time at a rate of interest agreed in advance. The bond is usually secured by a charge on property. They are available direct from some property companies or via intermediaries.
Property bonds can offer a high rate of interest. Rates from 4% up to as much as 15% are offered by some property bonds. As with some other alternative ways of investing there can be tax advantages too, such as the ability to use an innovative finance ISA (IFISA) or invest through a pension scheme. However, property bonds do involve a degree of risk that the project (or company) invested in might be unsuccessful.
Rent to rent
Rent to rent or R2R is a scheme where you rent a property from its owner and then rent (or rather let) it out to tenants. The rent to rent operator generally creates a margin for themselves by negotiating a reduced rent with the property owner (normally in exchange for a guaranteed rental income) compared to the asking market rent. They may also seek to add value. For example a typical kind of rent to rent scheme is to rent a large house and then let it out as separate rooms or a HMO.
In some ways rent to rent is similar to buy to let and has some of the drawbacks of buy to let. But there are some crucial differences too: With rent to rent you don’t buy or own a property. So you don’t need finance and there are none of the risks and responsibilities that ownership involves. Importantly, rent to rent operators aren’t impacted by the withdrawal of mortgage interest tax relief (Section 24) nor issues like Capital Gains Tax.
Every alternative to buy to let involves its own advantages and disadvantages. Would-be investors should carefully investigate the pros and cons of each before becoming involved and take professional financial advice where necessary. However, property investors who have decided that buy to let isn’t for them should be inspired by the fact that many property investment alternatives are available.