By Louise Misiewicz
Have you considered REIT as part of your portfolio?
What are the benefits of REIT over direct investment?
Having spoken to a buy-to-let property investor client at length yesterday about the benefits of direct property investment and REIT, I’m going to dedicate a full blog post on it here for your reference, too.
REIT, or Real Estate Investment Trusts, are a way of including property within an investment portfolio without directly investing as a traditional property investor would. It offers diversity within investment.
REITs are traded like stocks on the market, and in essence are collections of property-related assets. They might include residential, commercial, industrial or agriculture property units. Some REITs include storage units, or mortgages, or malls, or a mix of investments.
The idea is that you have exposure to real estate without actually directly owning the property.
Why should you consider diversifying with REIT?
Property investment landlords have been increasingly vocal recently about the tax burden levied on the sector, and REITs offer an alternative to the high capital investment required to build a good portfolio.
For those who want exposure to property, but don’t have the capital for direct property investment, REITs can be a reasonable choice for developing a financial portfolio. REITs have also been accused of developing large-scale ‘institutionalised landlords’ in the past, although the traditional landlord is still responsible for the lion’s share of rented properties in the Private Rented Sector as I write this article. That may change.
Why, then, if REITs are responsible for the growth of ‘institutionalised landlords’ in the UK, should you consider a REIT as part of your property investment portfolio in 2017 and beyond 2020?
Introduced in the Finance Act 2013, REITs are subject to a different tax regime than individual landlords. This means that REITs are not subject to any tax on their rental income, nor are they subject to tax on their gains.
There are REITs that provide the ability to diversify across property types, geographic locations etc. Plus, there are REITs that pay dividends, so they can be included within different income portfolios.
Some of the other main benefits of REITs currently include:
- Economies of scale – ability to buy blocks of flats rather than just one
- Mortgage interest is 100% allowable in a REIT, but not as an individual. High rate taxpayers will only be able to offset circa 50% of mortgage interest costs beyond 2020.
- Income is distributed in a tax efficient way – sometimes tax-free via an ISA (which is a significant improvement for high rate taxpayers that directly invest money into residential properties that would pay between 40%-100% of their property income)
- The management of the tenant is taken away, as the REIT will do all of this
- No need to keep track of individual rent receivable/costs, as the REIT management team do this
Is REIT a profitable long-term investment option for you?
I would say that as an alternative to traditional property investment without the same levels of capital outlay, then potentially, yes, REITs are worth considering as an addition to your portfolio in 2017.
Combined with some of the following elements to consider from directly investing in property are standing as potential incentives to some of my investor clients to consider investing in REITs:
- You have to identify and perform due diligence on a property (many times, the calculations are incorrect, resulting in a less than a profitable property investment business)
- You have to buy a property via a solicitor/estimate agent (meaning the normal stresses of buying any sort of property are involved)
- You have to get a mortgage and go through the mortgage application (this can be very stressful)
- After all the hard work above, you still need to refurbish the property (and potentially deal with builders where they quote £10K but might end up costing £15K)
The choice, of course, is up to you. If you’re unsure how to proceed with REITs, please feel free to get in touch with me and my team of property tax experts here for an informal discussion on the subject.
When it comes to looking at the long-standing benefits of directly investing in property investment, it is worth reviewing the following articles I’ve written below, as useful resources and reference items:
Investing in REITs and direct investment in property both come with advantages and disadvantages.
Ultimately, you have to weigh the options and decide which better fits your investment attitude. Some investors prefer a mix of REITs and directly-owned property. Others prefer one type over the other.
Before you invest, make sure you know what you are doing, and understand the risks involved with both. Get professional advice that takes all things into account.
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