Headline figures on investment returns can be particularly misleading for this reason: rarely do investors have a true, bottomed-out view of their net rental income, including the full costs of letting or management, nor do they make provision for rental voids, insurance, maintenance and future capital expenditure.
Add in the costs of financing and there is a fair chance the numbers will not justify the risks of individual buy-to-let investment, particularly as leverage amplifies downside risk and successive governments have shown their willingness to disincentivise BTL through HMRC.
All this would matter less if the sums at stake were small. But today the entry ticket for investment in residential property is – at a minimum – the price of a deposit.
For those unwilling or unable to borrow, the average UK house price is now greater than £200,000.
Despite the attractions of the residential property market from a risk point of view, the traditional means of access via buy-to-let introduces its own risks, which are all magnified by the sums at stake.
One solution, popularised by financial start-ups, has been to lower this initial investment hurdle by facilitating collective ownership in individual properties through an online platform.
A number of these ‘property crowdfunding’ portals now allow investors to buy fractions of individual properties, starting at just £100. You never get physical access or control of the property as the investment is purely financial, but in return investors are relieved of the burdens of management.
This crowdfunding approach also introduces its own risks.
It is less tax-efficient than BTL, with corporation tax on gains and income, in addition to personal tax liabilities on top.
Moreover, trading stakes in individual properties on a proprietary platform introduce risks around asset valuation, investor liquidity and fees, which can vary dramatically.
Many opportunities are levered, and investments have displayed significant price volatility versus the performance of the property assets themselves – potentially interesting for some, but a clear additional risk versus the property market.
Traditional solutions, like real estate investment trusts (Reits), offer a tried and tested way to lower the investment hurdle, and they have the benefit of being eligible for tax wrappers such as Isas and Sipps.
Reits differ from crowdfunding insofar as they are regulated companies holding portfolios of properties in which one buys shares, meaning investors have a claim against the entire assets of the company rather than just an individual asset.
Reits are highly regulated with regard to diversification, governance, accounting and asset valuation, which is another benefit of opting for this more traditional mainstream vehicle.
The assets that Reits contain can vary tremendously, with many of the better known companies working principally in commercial property.
There is increasing interest in residential property Reits, which focus on buying and holding residential property exclusively – the closest alternative to direct property investing. These provide investors with a means to spread an investment across a portfolio of properties away from home, in a tax-efficient, diversified, hassle-free manner.