How to Invest in Property with Minimal Cash

Property as an investment asset has become increasingly more popular in recent decades amongst investors. It has moved from a peripheral part of an investor’s portfolio into the mainstream. In recent times Investors are not reducing their allocation to real estate – rather they are either keeping allocations steady or increasing them, sometimes in a very meaningful way. High-quality property continues to offer income yields of around 4 to 7 per cent, which is highly compelling compared with fixed income returns which continue to remain low.

Real estate is, for good reason, seen as a cash cow for investors. However there is one fundamental problem with real estate - it's expensive...very expensive. Traditionally one must save money for years in order to pay for a deposit on one property that's value can fluctuate wildly as we have seen during the Financial Crisis. However I am here to tell you that there is an alternative way to invest in property which can be done with a small amount of your local currency.

Invest indirectly in property.

Direct real estate investing involves buying a stake in or the entire ownership of a specific property. However indirect real estate investing typically involves buying shares in a fund or a publicly or privately held company. The most common forms of indirect investing is to buy shares of non-traded or publicly-traded real estate investment trust (REIT) stocks, property unit trusts or managed funds. There are numerous differences between investing directly and indirectly in property:

Responsibility & Management Costs: Serving as the Landlord of a property attracts extra responsibility compared to indirectly owning property. As a property owner you are responsible for finding tenants, collecting rents and for the general upkeep if the property. Many of these responsibilities have costs associated with them that must be borne by the Landlord. Indirect property investment is a passive form of investment, which means the investor does not have to get involved in the day-to-day hassles like rental collection, maintenance, etc.

Diversification: Direct and indirect property investments offer differeing levels of diversification. Direct investment in a property will normally constitute buying one property which does not offer large amounts of diversification. The foremost advantage of pursuing indirect types of property investments is the larger scale of diversification the investor has access to. By investing in a property investment vehicle the investor can achieve a level of diversification that is only possible through purchasing a large number of properties, which is infeasible for the vast majority of investors.

Control: One of the main advantages of direct investing is that this format offers greater control in decision making, particularly when it comes to application of the investment strategy. For example, in a direct investing format, an investor can select properties with criteria based on location, property type etc. Indirect property investment vehicles are run by Manager’s who decide which investments to pursue, giving the shareholder no control over what is invested in. This can be advantageous if the investor is not knowledgable about investing in property.

Liquidity: One big difference between direct and indirect property investment is liquidity. A direct investment in property is not very liquid, where the process of selling off a property or part of a property can take weeks or even months to achieve. Indirect investments, akin to an investment in shares, can be liquidated very quickly, usually in a number of minutes.

Up-Front Capital Investment: Real property acquisition often requires a significant capital deposit as part of any finance agreement, normally constituting a not inconsequential percentage of the property’s value, often amounting to thousands of euro. Comparatively indirect property investment does not require as much up front capital. Shares in a property investment vehicle on the other hand can be acquired to suit the investor’s budget.

Falk (2012) found that studies carried out during the 2000’s have shown that securitized real estate has outperformed the direct real estate market with as much as up to 500 basis points on an annual basis during the 80’s and 90’s.

Real Estate Investment Trusts are the most popular indirect methods of investing in property. A REIT is a property investment company listed on a stock exchange that owns and manages property on behalf of shareholders. E.g Green REIT Plc. REITs can invest in commercial property, residential property or both. REITs have a special tax treatment to align them more closely with the tax arrangements for direct investment in property. To qualify as a REIT (and avoid corporate income tax), at least 90% of its profit must be disbursed to shareholders as dividends. You invest by buying shares in the REIT. A REIT has two separate elements for tax purposes: a ring-fenced property letting business which is exempt from corporation tax; and non-ring-fenced activities like property management services which is not. If the REIT you invest in does well, you will receive a distribution of the profits.

Advantages
· Investors are able to diversify within the real estate market by holding an interest in multiple
properties with minimal dollars.
· Risk is pooled among many investors versus a sole property owner.
· REITs pay high cash dividends.
· High liquidity
· Investors share ownership in large properties, like major office buildings or hotels, that they would otherwise be difficult to afford.
· Properties are professionally managed.
· Foreign individuals, otherwise restricted from owning property, can have an interest in such property via a REIT.

Disadvantages
· Exhibit low growth since they must pay 90% of income back to investors.
· REIT dividends are taxed as regular income at a much higher rate.
· Investment risk can be significant.
· REIT investors concede control of all the operational decisions that an individual property owner would make.
· Some REITs will incur high management and transaction fees, leading to lower payouts for shareholders.

REIT’s are popular with investors for a number of reasons. REIT’s provide competitive long-term rates of return that complement the returns from other stocks and from bonds. They offer high dividend yields, are liquid, give investors exposure to markets such as commercial property which are hard to get into for small investors and they are well regulated. REIT’s have also performed exceptionally well in the recent past. The S&P 500 REIT Industry Index has soared 153% since 2009, blowing away the 130% gain by the S&P 500. The outperformance is actually greater than that because REITs are yielding 3.7%, which is nearly twice the yield of the yield of the S&P 500.

So what are you waiting for? Want to start your real estate portfolio today? Well you can through indirect investing.