When it comes to investing in property, most people associate this type of investment with purchasing a second property for short-term let, but it is not the only way to invest in real estate. Alternative property investments, properties like service stations, parking garages, healthcare facilities, data centres or office spaces, can be a good way to diversify the investment portfolio, acting as a safety net during adverse market conditions, since they provide a relatively stable return on investment throughout the year and through market slumps.
For example, despite slumps in economic growth, private healthcare facilities’ performance tends to remain relatively stable, since people will always need to use these kinds of services. Short term lets, on the other hand, perform well during peak tourist seasons and wane during the off seasons.
Let’s take a closer look at some of the different ways to go about real estate investment in the UK.
| 🏠 What are alternative real estate investments? | Alternative real estate investments are property investments made for a return that differ from traditional buy-to-let real estate investments |
| ❓What are REITs? | Real estate investment trusts (REITs) are companies that own or manage real estate that produces income, pooling together capital from different investors in order to acquire or manage real estate investments |
| 💡 Why should I become a property developer? | Investing in property is especially enticing to those who want to diversify their portfolio, as long as they are financially able to overcome the initial financial debt entry barrier associated with investing in a mortgage |
Choosing to become a property developer
For most, the prospects of investing in and developing property for the sake of generating a return are enticing – the cost of rent in most areas continues to rise, and people will always need housing. In today’s market, it can be especially profitable to let property, since the high costs of property has many people weighing the pros and cons of renting vs buying. In addition to that, investing in property is especially enticing to those who want to diversify their portfolio, as long as they are financially able to overcome the initial financial debt entry barrier associated with investing in a mortgage.
The most traditional approach to property investment and development is buying-to-let, purchasing a secondary property with the intention to develop it into a means for generating additional income. However, as anyone who has learned how to save money for a house or owns a buy-to-let property can tell you, this approach is not without its drawbacks.
Investing in property away from buy-to-let
Buy-to-let property investments are the traditional form of real estate investment, in which properties are purchased, either by individuals or by companies, for the purpose of generating income through letting the properties to tenants. However, the high entry barrier, changing tax laws and rising mortgage interest makes investing in buy-to-let property difficult for many potential individual investors in the current market, while the time-consuming commitment of serving as or hiring a property manager to take care of the investment is a “turn off” for many would-be landlords, with many people weighing the pros and cons of buy to let vs personal pension.
Thankfully, other than investing directly in real estate, there are also alternatives to buy to let for alternative property investments in the UK, such as property funds, property investment trusts or co-investing in property, which pool together funds from multiple investors to invest in real estate projects.
Holiday lets
When it comes to property investment, another buy-to-let alternative example that most frequently comes to mind is that of purchasing residential properties in high demand areas to generate income from short-term, holiday lets. Though the travel restrictions in past years have not been particularly kind to the tourism industry in general, travel and tourism is expected to pick back up in the post-pandemic era. After being stuck inside for the past years, spending on travel and leisure is expected to increase, meaning that investing in holiday lets could provide a good return on investment over the years to come.
Compared to long-term lets, holiday lets are deemed to be more profitable, since you can generally make the same amount of money from a week’s holiday as you can from a month’s rent. Moreover, holiday let tenants don’t have the same occupancy rights as long-term lets, reducing the risk that investors will find themselves with squatters to evict. However, holiday lets, and the tourism industry as a whole, are always influenced by seasonal demand.
Social housing
Social housing is an emerging type of real estate alternative property investment that is both profitable and ethical. Social housing refers to affordable housing solutions that are provided and managed by a local housing association with a government-backed lease agreement, typically for lower-income tenants: people who need housing but cannot afford to buy one or pay full rent.
For investors, social housing is a particularly attractive alternative investment opportunity, since it is a steady income-generating asset, thanks to its government-backed leases, which can vary from 5 to 20 years. It is also attractive for the general ease of entry into the market – investing in social housing requires a lower buy-in than traditional property investment.
Property funds
Property funds are an alternative real estate investment approach, allowing individuals to invest in larger, commercial properties, such as office buildings or retail space, through pooling of capital from different investors. The pooled capital is then used to either purchase the property directly or may also be used to buy shares in property management companies or even other funds.
Property investment trusts
Other alternatives to rental property are property investment trusts, also called real estate investment trusts (REITs), which are companies that own or manage real estate that produces income. These alternative investments to buying a house are similar to property fund investment schemes – property investment trusts pool together capital from different investors in order to acquire or manage real estate investments, providing returns to investors without having to involve them directly in the purchase or management of the properties.
REITs are traded on most major stock exchanges like ordinary stocks, offering greater liquidity than traditional property investment and more appealing to real estate investors. Just as with property funds, they also offer greater diversification than direct real estate investment, since they will be invested in multiple different kinds of property, thus offering more stable cash flow. The downside to property investment trusts and property funds is that they are subject to potentially higher management and transaction fees.
Starting an investment account or Stock and Share ISA with Moneyfarm to start investing in property funds or REITs.
Co-investing into property
Similar to other alternative property investment options, co-investing into property involves the pooling of funds from multiple investors, either institutional or non-institutional investors, to purchase real estate directly, sharing the profits and investment risk. This type of property investment is common among institutional investors, and is gaining popularity among non-institutional investors.
FAQ
Are holiday lets a good investment?
Compared to other kinds of buy-to-let investments, holiday lets tend to be more profitable, since you can generally make the same amount of money from a week’s holiday as you can from a month’s rent, depending on the location.
When does it make sense to co-invest in property?
Co-investing in property investments can be a good way for investors to diversify investment portfolios, gaining exposure to real estate, while splitting the risks involved with another investor(s), making it a good option for risk-averse investors.
How can I invest in REITs?
REITs are traded on financial market exchanges similarly to stocks, meaning that by starting an investment account or Stock and Share ISA with Moneyfarm, you can easily start investing in REITs
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
