Investing in real estate: rentals, REITs and property crowdfunding

Three ways to put money into property

You can buy a property and let it, buy units of a real estate investment trust (REIT), or put money into property projects through a crowdfunding platform. The three differ in how much money you need, how much work they take, how quickly you can get out and what can go wrong. None of them guarantees an income: the investor-education website of Canada’s Ontario Securities Commission (OSC) reminds readers that “there is no guarantee that you will earn an income or profit”.

Buying to let

A rental property only pays if the rent covers everything. In the OSC’s words, you earn rental income “assuming that you charge enough rent to cover all costs associated with ownership, including any mortgages, taxes, utilities and maintenance.”

The risks the OSC lists for owning property directly:

• Time and money: “Be prepared to devote a lot of time to managing the investment, from handling paperwork to finding a tenant and making repairs, regardless of whether the property is producing any income.” A property manager saves time, but “their salary is an added cost.”
• Tenants: “You could end up with a tenant who doesn’t pay rent or damages the property.” Empty months bring no rent, while the costs continue.
• Prices: “The value of the property could fall below what you paid for it, and can leave you with a mortgage greater than the property’s worth.”
• Selling: “Real estate is not a liquid investment.” A sale takes time, and the OSC adds: “It can also be costly to sell due to real estate and legal fees.”

Gross and net rental yield

The gross yield is a year’s rent divided by the purchase price. The net yield is what is left after empty months and the owner’s yearly costs, divided by everything you paid to buy, including taxes and fees. Only the net figure tells you what the property really earns.

An illustration with made-up round numbers (not a forecast and not any real market): a flat costs 100,000 and lets for 700 a month.

• Gross yield: 8,400 a year ÷ 100,000 = 8.4%.
• One empty month: −700. Repairs, insurance, property tax and management: −1,700. Net rent: 6,000.
• Buying costs (transfer tax, legal and agent fees): 6,000, so the total paid is 106,000.
• Net yield: 6,000 ÷ 106,000 ≈ 5.7%, before income tax and before any mortgage interest.

The rental yield calculator does this with your own figures, and the rent or buy calculator compares owning a home with renting one.

REITs: property through a fund

Malaysia’s Securities Commission (SC) describes a REIT as “a collective investment vehicle, in the form of a trust fund, which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets”. The OSC gives examples: a REIT “invests in income-producing real estate properties, such as shopping malls or multi-unit residential buildings.”

• Listed or not: “There are listed and non-listed REITs. For listed REITs, you can buy and sell them like listed stocks.” Their price is set by the market, not by the buildings: the SC warns that “REITs may trade at a premium or discount to their respective net asset values”.
• Private REITs: the OSC says investing in one “is different from and generally riskier than investing in a public REIT”. Such units “may be difficult to value and cannot easily be resold”, fees can be higher, and you “could be held personally liable for paying the obligations of a private REIT if the REIT can’t pay for its obligations” — a capital call.
• Fees: “A REIT investor is subjected to management and trustee fees, including property management fees.”
• Income is not guaranteed: “The distribution payments from investing in REITs are not guaranteed”. Payouts fall when the buildings earn less; the OSC names “higher vacancy rates or tenants that don’t make their rent payments”. The SC adds that “changes in the interest rates may affect REITs price”.

Kenya’s Capital Markets Authority (CMA) describes two kinds. An income REIT (I-REIT) “primarily derives its revenue from property rentals”. In a development REIT (D-REIT), the money goes “towards development and construction of property for sale and/or rental”, and the returns “come from capital gains from the project when the company completes development and exits”.

Tax rules for REITs differ by country. In Malaysia, for example, the SC notes that a REIT is exempt from income tax if it distributes 90% or more of its total income to unit holders.

Property crowdfunding

Crowdfunding platforms let many people put small amounts into one property project, as a loan or as a share in it. The UK’s Financial Conduct Authority (FCA) lists the extra risks of property development projects:

• they “carry a higher risk of losing your money if the company crowdfunding can’t complete the project or repay the loan”;
• for property abroad, “different laws apply and currency changes could affect how much you get back”;
• your money may be pooled, “spread across several projects rather than invested in one specific property”.

More generally, “If the company you’ve invested in fails, you might lose all the money you have invested”, and you “may not be able to get your money back quickly, or at all”. In the UK, loan-based and investment-based crowdfunding give no access to the investor compensation scheme. Our guide on peer-to-peer lending explains how loan platforms work and what the rules require.

Before you invest

1. List every cost: purchase taxes and fees, yearly upkeep, management, empty months and the cost of selling.
2. Compare the net yield, after costs and tax, with what a government bill or a bank deposit pays, and check both against inflation with the real return calculator.
3. Find out how you would get your money out, how long it would take and what it would cost.
4. For a fund or a platform, check on the regulator’s own website that the company is licensed, and read the prospectus or offer document, including the fees.
5. Do not put money you may need soon into a single property or project.