Can you get better tenants?

Can renters build house equity while renting?

A common friend recently introduced me to the founder of Adjoin Homes, a new London-based property startup.

I thought I’d write about what they do as it might be applicable to you either as an investor or as a tenant.

I will explain what the new Rent-to-Own model is about.

Apparently, this is a big thing in the US. I didn’t know. The UK is just getting started.

Adjoin call it ‘Rent Now Buy Later’ ;)

They want to make housing-wealth accessible to everyone. At the same time, they want to improve the landlord experience.

Rent-to-Own Property: What is it?

Rent-to-Own is a scheme that gives tenants the option to buy the place they are renting in the future. It changes the traditional buy-to-let market dynamics so that both the landlord and the tenant can benefit.

To clarify, we are talking about the Rent-to-Own in the private property market. Not the government’s rent-to-own or rent-to-buy scheme.

In this article, I will explain how the Adjoin scheme works based on the discussions I had with the co-founders.

Here’s how the Adjoin Rent-to-Own scheme works:

1. As a tenant, you see a property you want to buy on the open market or on Adjoin’s pre-approved portfolio.
2. You start renting. While you rent you build equity in your home.
3. As the home appreciates, you get part of the upside if you buy or even if you leave!

The tenant gets their dream home. The investor-landlord gets a stable income and a low-maintenance property because the tenant has ‘skin in the game’.

Let’s explore it in more detail.

Rent-to-Own for Tenants

Benefits of Rent-To-Own for the tenant:

• Build up housing wealth while renting
• Frozen rental payments for a number of years
• Try the property before you buy
• Afford to live now in your dream place – no need to move again
• Get the option (but not the obligation) to buy the rental home when you have the deposit

Adjoin will let you live in a home 8x your salary, unlike 5x which is the typical mortgage. Eventually, you have the option to buy it too.

Saving for a deposit in a housing bull market…

The Booster

As a tenant, you have the option to pay a “booster” to the landlord. This is a one-off payment, at the beginning of the agreement equal to 3, 6, 9, or 12x the monthly rent.

You don’t have to pay a booster. But if you do, it gives you 2 benefits:

1. You can live in a more expensive home
2. It lowers your rental payments

Speaking of rental payments, these come at a premium (around 10-20% more than the open market). The booster helps to lower that somewhat.

Even though the rent is at a premium, it is guaranteed to stay the same for the entire contract period. So even without the booster, the fixed-rent feature alone might be worth considering.

Initially, I had some second thoughts about the booster. But I understand why it exists. It shows commitment and compensates the landlord for frozen rental payments. The tenant is more likely to take the arrangement seriously once they join.

The booster is entirely optional.

When can the tenant leave?

The tenant can leave anytime. If you leave before the early exit period (1-3 years typically), then you are not entitled to any gains if the house value goes up.

Here the tenant gets an added benefit: They make sure they cannot be removed from their rental property, as long as they make payments of course. This is not the case in the open market where the landlord sometimes wants to sell or whatever.

I still remember one of the main reasons we bought before my wife gave birth was actually this one. We wanted to make sure we won’t have to move for the next 2 years.

Life with a baby is already disrupted, we didn’t want to make it worse!! It also reminds me that buying your own home is actually more psychology than finance. Money comes 2nd.

We all know there’s no free lunch.

There are upfront fees for joining as a tenant.

Tenant fees and how the booster helps

Pay once – no hidden fees.

• Booster payment (optional)
• 0.5% security deposit  (returned at end of tenancy)
• 0.3% legal/due dil fees
• 1% Adjoin fee

These are the figures according to Adjoin’s current plan.

The tenant won’t pay for the maintenance of the property. It will work exactly the same as in the traditional rental agreement.

So for a £500k property, the fees are £6,500 to Adjoin, £1,500 legal, a £2,500 security deposit plus an optional booster.

This seems like a lot. But as you’ll see in an example later, you can make up the fees and then some if your future house appreciates.

Is my first-time buyer status lost if I keep renting with Adjoin?

You are still a first-time buyer as long as the first-time buyer status is concerned. So if you exit instead, and buy another property, you’d still be considered a first-time buyer.

Rent-to-Own for the Investor – Landlord

Even though the tenant side seems to be getting all the glamour, the investor has many reasons to join the scheme.

Benefits for the investor:

• Aligned incentives with the tenant who has skin in the game
• More secure rent
• Hassle-free property exposure
• Income stability
• Already have a buyer and move on to the next

They accept limited company investors too.

If you have a property already you can let it out through Adjoin for a stable rent.

If you don’t own property yet,  Adjoin gives you the option to buy a BTL in a more controlled fashion than the open market. That’s because they vet both parties and the property as well.

Every landlord wants similar things. They want to make sure the tenant pays the rent, takes care of the property and stays as long as possible. They also want their house value to go up.

We know the tenant is serious about living there. They have decided they want to eventually buy it, they have paid fees and a (small) “deposit” after all. It is unlikely they will forgo all that by missing out on rental payments or damaging the property without care.

Even if the tenant decides not to buy the property, the refurb costs should be low.

This is valuable for a landlord who wants peace of mind and income stability.

Of course, all these benefits have a cost. As a landlord, you give up some of your future house appreciation.

It’s important to note that you don’t give a part of your property if the house price does not increase. You only give a part of the upside, if it appreciates.

So I’d say the scheme might be quite attractive if you are one of the following:

• An existing landlord who is tired of dealing with bad tenants
• Income-seeking investor, looking to invest in property
• A pension fund
• Risk-averse landlord

For me, the biggest win in this situation is the alignment of the incentives. In the traditional rental property, the landlord wants to maximise profits whereas the tenant wants to minimize rent.

This is still the case here, but there’s less friction. The investor also saves on fees.

What are the investor/landlord fees?

Adjoin acts as the rental agency for both the landlord and the prospective buyer.

The management fee is 7.5% of rental payments, which is lower than the typical 10-15% many agencies charge.

If a landlord provides an existing property, they charge a 1% fee of the property value for finding the tenant and coming up with the multi-year structure.

According to Adjoin’s current plan, if a new investor (not yet landlord) comes aboard, they pay a 2% sourcing fee to get a property.

Let’s have a look at a Rent-to-Own example.

Rent-to-Own Home example (with Adjoin)

Here is a Rent-to-Own example from the real world.

Adjoin gave me access to their calculator which is used by tenants/investors. To get access you need to sign-up.

From an investor’s point of view, I used these assumptions:

As an investor, you’re getting into a 6-year contract with the tenant, who pays £2,000 monthly rent. You receive £6,000 upfront from the tenant (booster).

After 6 years the tenant has bought some of your house appreciation. That’s because they paid the booster up front, paid higher market rent, and did not miss any payments.

How much of your home has the tenant bought? 5.6% to be exact. That would be £35,596 after 6 years of a 3% house price growth.

After 6 years, how does Adjoin rent-to-own investing compare with traditional buy-to-let investing?

Rent-to-Own vs Buy-to-Let

Let’s see how Buy-to-let yields compare against Rent-to-Own yields using Adjoin’s stats.

We use the Internal Rate of Return (IRR) metric. IRR simply estimates the profitability of our investments. The higher the better.

In the first few years, the IRR (internal rate of return) is negative. That’s because the upfront cost of buying the property has not been amortised enough from a discounting (ie IRR) perspective.

Here I’d like to be able to play with different rental yields for the traditional Buy-to-let.

The assumption they make for BTL is a 3.75% annual yield first year, plus 3% rental growth thereafter. This is what Adjoin believe is typical of a London property similar to the ones they target.

However, the scheme can work for any rental yield. The founders told me to contact them if someone is interested in seeing the numbers under different conditions.

We also know that a big chunk of buy-to-let returns come from house price appreciation, less so from rent. When I tweaked the house price growth to be 8% instead of 3%, the situation favours the traditional buy-to-let route. Buy-to-let wins at a 15.28% internal rate of return (IRR) vs 12.04% from Adjoin.

8% per year is less likely to happen if you ask me. But it goes to show that if house price appreciation is your strategy, then you should not sacrifice valuable equity upside!

If you want more downside protection, income stability and a vetted service then Adjoin might be the answer. Have a look at what they offer.

In fact, I like the honesty the calculator provides. Based on different house price growth, it shows you at which point BTL becomes more favourable.

So in our scenario, the break-even point when comparing Adjoin vs BTL is between 4-5% annual house price growth.

Overall, the results for an income-seeking investor look quite promising. With Rent-to-own both the tenant and the investor ‘hedge’ their bets and align their incentives.

But you know me. When a new scheme comes around, I always ask: Where’s the catch?

Where’s the catch?

This was my first question (and it always is when I hear about a new thing).

I don’t think there’s a catch, but it’s important to understand what the scheme is about.

Every tenant wants to live somewhere nice. If they plan to buy, they want to stop playing catch up with house prices.

The landlord wants to get paid. Often the landlord wants to make sure the tenants pay the rent, take care of the property and stay as long as possible.

Effectively, Adjoin has tweaked the traditional buy-to-let economics to align the tenant and landlord incentives.

It’s effectively an affordability product for the tenant, with attractive features for the investor-landlord.

It’s helping the tenant live where they want NOW while building equity towards buying it.

My opinion is that if the tenant is close to securing a property shortly on their own there’s little value in joining. But at the same time, the tenant can go for a higher value property, i.e. their dream home right now. Something that would take years to reach on their own, beating the classic ‘Rent and save’.

For the investor, there is no catch either. You give up some of your equity upside (if it happens) for a more secure income and lower maintenance.

Also worth mentioning is that as a new landlord (or existing one) you’re basically offering the option for someone to buy your property in X years. This can be as long as 12 years but still. You agree to potentially sell your property.

This might not come at a time that it’s tax-favourable for you or you might change your mind about selling. But there’s little you can do about it if the tenant doesn’t agree. So you have to view it as a fixed-term property investment.

I asked Kostas, the founder this question after looking at the real-world example:

How come both the tenant and the landlord are better off after 6 years? All else equal, shouldn’t one of the parties be worse off versus their open markets (BTL, rental market)?

Not really :)

– investor: by switching to adjoin they gain (relative to BTL) *both* with less operational costs (ie maintenance) and higher income (at least initially). This makes the “giveaway” in the equity, worthwhile from an IRR perspective. 

– tenant: by switching to adjoin relative to renting and saving they may give more rent (at least initially) but effectively their money grows with house price growth (and with a floor at zero). 

Hence, if the house price grows sufficiently they can both gain.

Kostas Zachariadis, Adjoin co-founder

What does Adjoin actually do?

They make sure both parties enter into a fair agreement. They sort out the legal side of things, the vetting of the properties and they provide technology for finding suitable properties for an investor and tenant.

Adjoin are paid for the work. They are also the manager of the property (7.5% management charge coming out of rental payments).

I think of them as both the buyer’s and the seller’s agent.

Is the Adjoin scheme the same as shared ownership?

It shares similarities, but there are some big differences. When I wrote about Shared Ownership, in 2018, I called it The Cheapest Way to Rent.

Shared Ownership is when you buy a fraction of a house you want to live in. But there are some big limitations. You need to have a household annual income of less than £90k. Sometimes even lower which makes it even harder if you are a higher earner. Then the property has to be less than £500k with big limitations.

It’s supposed to help the people without a deposit yet. But an unwanted side effect is that it inflates the prices of new homes. Basically, the main beneficiaries have been the property developers.

A Few Words from Kostas

I asked Kostas to tell us a few words about himself and Adjoin. He is an Economics and Finance Professor for 14+ years in top universities in the UK.

His academic background in financial markets triggered some interesting discussions about stocks and property markets.

Marios, the second founder, is a 2x proptech founder, data scientist, computational physicist and published quantum researcher. He holds a PhD from the University of Heidelberg. Before Adjoin Homes he worked as a data scientist for the Web of Science – the largest and oldest scientific citation database – and as a research scholar in universities such as Heidelberg, São Paulo, Vienna, Massachusetts, Los Alamos and more.

I love London, for me, it offers the best combination of career opportunities and lifestyle. However, even with a good salary people cannot buy where they work and like to live, so like me most rent.

Renting is fine, what is not great is not being able to share on the wealth that we all help create, and gets into house prices. I calculated that if Adjoin was around when I started renting my flat, I would have £100,000 now, double what I could have saved by myself, this is a lot!

My landlord would also have someone paying a high, stable rent, who wouldn’t want to leave, and who would treat the property even more like their own. It’s a win-win.

Kostas Zachariadis, Adjoin co-founder

So yeah, time will tell if the Rent-to-Own becomes the next big thing like in the US. I certainly find it promising both for existing landlords and new investors alike.

Good luck Adjoin!

As a UK property investor, you face this question occasionally.

People used to buy buy-to-let in their own name. With the recent tax changes, things changed. Investors have started buying property using limited companies.

One big advantage of doing so is that company Buy-to-let owners have lower taxes. They enjoy better tax planning too.

Companies can treat the mortgage interest as an expense. This is tax-deductible. Personal landlords can only claim a 20% tax relief on the interest amount, so tax is higher!

But running a company is not as straightforward. You can’t treat a corporation as if it’s your personal bank account. A company comes with extra admin and accountancy costs.

You might also pay higher interest rates on the mortgage!

So what’s better? Should you buy property through a limited company or not?

Here is what this guide covers:

Benefits of Buying Property through a Limited Company

Top reasons for buying property via a limited company:

1. Pay lower tax on rental income
2. Expand your portfolio faster
3. Detach your personal taxes from your property portfolio
4. Better family and estate planning
5. Better negotiating power when selling
6. Be more ‘professional’

1. Pay lower tax on rental income

Companies pay corporation tax on rental income. Individuals pay income tax, instead.

Corporation tax is currently 19%, which is lower than income tax in most cases. Income tax is 20%, 40% or 45%. This depends on your tax bracket.

As a result, buy-to-let companies pay lower taxes than most individuals.

For you to enjoy the money, you need to take it out of the company. So you are ‘double taxed’ in a way. But it can still work out better than personal ownership (see case study below).

From 2023, the corporation tax will be 25% for annual profits greater than £50,000. But even if you exceed the threshold, it would still be lower than higher rate taxpayers.

2. Expand your portfolio faster

If you plan to build a property portfolio, an LTD company might be a better way to do it.

Why? Because lower taxes mean faster compounding if you re-invest them.

You can build a property portfolio much faster and only take profits home when you need to.

3. Detach your personal taxes from your property portfolio

If you own property in your own name, any rental income or property sale is taxable in the same tax year.

This can get expensive if you already have a job or an income from other properties.

Just ask those landlords who wish they had incorporated their properties when they bought.

When investing through a limited company, you detach your personal tax affairs from your property portfolio.

The company’s profits have nothing to do with your personal tax situation.

The business pays corporation tax. You don’t have to pay any income tax, unless, well, you take an income. But leaving the funds inside the company or re-investing it is a quick way to expand.

The benefit of this approach is that you then take the income when you actually need it.

This is very useful because you can time the income you take from the company for when it’s favourable to do so. i.e. take a year off, reduce your working hours, or sell the business for a profit.

4. Better Family and Estate Planning

Do you know what’s better than a buy-to-let company? A family buy-to-let company!

Family can do work as part of your property portfolio and get paid by the company. Or they can become shareholders and receive dividends.

This way, you utilise their tax allowances too. UK taxpayers have a tax-free £12,500 personal allowance every tax year.

Be careful when paying children before the age of 18. This is considered income shifting by HMRC. It will be taxable at your marginal tax rate instead!

You can also reduce your estate tax by offering shares of the property business to your heirs. This needs careful tax planning.

But one option is to do it in an orderly way and eventually transfer the business tax-efficiently. Also, a side effect of paying them dividends is that it saves you future inheritance tax on those profits.

5. Better negotiating power when selling

Say you want to sell your personal property. The buyer will have to pay the entire stamp duty tax to buy your property. This can be very high, like 6% of the value.

But if you own property through a limited company selling becomes a lot more attractive.

This is because you would be selling your shares of the limited company, not the property directly. As a result, the buyer would need to pay only 0.5% stamp duty for your shares. This is much lower than the traditional stamp duty tax on property.

This counts as a company shares transaction, not property!

This can give you negotiating power because you save them money.

6. Be more professional

It used to be that most landlords were ‘accidental’. So a family buys a house, moves to a bigger one and keeps the small one as BTL.

The government made it clear they don’t like amateur landlords. The playing field has changed. It’s harder to succeed in the world of BTL now. Sky-high housing prices, higher taxes and more regulation come to mind.

Doing property as a hobby is harder, only the professionals will survive.

Like Finumus best put it – “It’s not 1994 anymore.”. That’s not to say BTL is dead or anything. But as your obligations increase you need to be more professional to succeed in property.

Reasons to Buy Property in your Personal Name

About half of all new buy-to-let purchases now happen through a limited company. But there are good reasons to still buy in your own name.

Here are the top reasons why you should own buy-to-let in your own name and avoid the limited company route:

1. Easier than starting a company
2. Personal buy-to-let ownership works better for basic rate taxpayers
3. Less scrutiny
4. Cheaper mortgage rates

Let’s explore them in more detail.

1. Easier than running a company

Running a property company comes with extra admin headaches. To name a few:

• Annual accounts + company tax return
• Finding an accountant
• A company bank account
• A yearly confirmation statement

Owning property in your own name is simpler. You already have a bank account and perhaps file a personal tax return too.

With property in your own name, you avoid the extra hassle both at the beginning and on an ongoing basis.

2. Better for Basic rate taxpayers

It’s true that LTD companies can save you tax. Despite all the buzz, owning buy-to-let property as a basic rate taxpayer works out better.

This is because your income is only taxed once. You pay 20% tax on rental income and 18% capital gains taxes. That’s it. You can also enjoy your annual personal allowance (£12,500) if it is not used.

As your income increases, owning property in your personal name gets less favourable. Particularly so, if you own other properties or have a high-paying job.

But basic rate taxpayers are probably better off without a property limited company.

3. Less scrutiny

As a personal landlord, your finances are scrutinized. The lender will check your property and your personal finances before giving you money.

Sometimes people think that company BTL lenders will only check the company. That’s not the case in most cases.

If you get a mortgage through a limited company, the directors will still need to personally guarantee the loan.

So your liability does not stop at the company level. You are still liable for the debt with your personal wealth. It’s a company mortgage in all but name 🙂 !

4. Cheaper Mortgage rates

Company buy-to-let mortgage rates are higher than personal ones.

So you can find a BTL mortgage at 2.5% but the company one will cost you 3% interest instead.

As more company mortgages come to market the landscape improves. Competition works in our favour.

There’s still a difference. Company mortgages are just more expensive!

As you can see, it’s not a black or white decision. Despite the government fighting private landlords, it might still work in your favour. Personal finance is just that – personal!

For higher-rate taxpayers, buying property through a limited company will most likely be the best option.

But enough words, let’s have a look at an actual example.

Case Study: Company Buy-to-let vs Personal [Higher rate taxpayer]

Let’s do a personal vs company buy-to-let comparison.

Taking the average UK house price and average rent.

House price: £278,000
Deposit (75% LTV): £70,000
Interest: £444/m (2.5% rate)
Rent: £1,100

Say 10% Maintenance.

Rent received: £1,000

Personal Investor

The Personal investor is a higher rate taxpayer so will be taxed 40% on the rent. But due to the “Section 24” tax changes, the personal investor will only be able to claim a 20% tax back on the interest.

[Monhtly] Personal Tax = £1,000*0.4 – 20%*£444 = £311

[Monhtly] Personal profit = £1000- 444 (interest) – 333 (tax) = £233 per month = £2,796 per year

So we put £70k down and earned £2,796 that year.

That’s a 4% return on our initial investment [personal buy-to-let]!

Not bad.

Let’s compare that with the company investor.

Company Investor

The company investor will be able to deduct the entire interest from their taxable profits.

£1000-444 (interest) = £556 taxable profit

[Monthly] Company Tax = 19%*(£556) = £105.64

[Monthly] Company Profit = £1,000 – £444 (interest) – £105.64 (tax) = £450 per month = £5,404 per year

So the company investor put £70k down and earned £5,404 that year.

That’s a 7.7% return on our deposit!

The company investor ended up with almost double what the personal investor got (4%).

Now you might say, NOT SO FAST!

Those profits belong to the company. If we want to take the profits home we need to pay tax.

The good thing is that the tax from company dividends is lower than the income tax from buy-to-let in your name.

Taking an income from a limited company depends on your tax rate. But dividends are taxed lower than rental income.

All things considered, the company approach gives you more flexibility. You decide when you want to take the income at a time when it’s more favourable to you.

You can roll it up in the company, buy another property instead, distribute dividends to family members etc.

But even if the company investor wants all income out each year, it still works better.

Annual profit = £5,404
Total dividend tax = £2,255
Take home company= £3,148 vs Take home personal, BTL = £2,796

It gets even better if you plan on selling the property. This is because company taxes (19%) are lower than capital gains taxes (28%) for higher-rate taxpayers.

So in the above scenario, buying buy-to-let property through a limited company is better than buying it in your personal name.

The corporation tax goes up to 25% in 2023 for companies with annual profits >£250,000. Yet, property companies will still enjoy the 'small profits rate'. This keeps the Corporation tax to 19% for annual profits up to £50,000. It gets more complicated if you operate more than 1 company, as these limits get halved.

How to Buy Property through a Limited Company

To buy property buy-to-let through a limited company, you need 4 things:

1. A company (SPV)
2. A bank account
3. An accountant
4. A mortgage (optional)

SPV – The company vehicle

SPV stands for Special Purpose Vehicle. It’s a fancy name for “a company set up wholly and exclusively for investment in property”.

Lenders like to see a pure property vehicle because it removes the risks from other operations.

So if you need a company buy-to-let mortgage, then an SPV company will be needed. But registering a new company is easy. An accountant can do it in a matter of days.

Note that your SPV should have one or more of the following SIC codes:

• 68100 Buying and selling of own real estate
• 68209 Other letting and operating of own or leased real estate

A SIC code provides guidance on what the company is doing.

Funding the SPV can happen in many ways. One is a personal loan from you (director’s loan). The company can return the loan to you free of tax.

Another way is to lend money from other companies or by implementing a group structure. There are different pros and cons to these tax structures. The Company investing course covers them in detail.

Bank account

You would need a company bank account too. You can either use a high street bank or a challenger bank like Starling.

But make sure it is FSCS-protected. This means the government will protect your funds (up to £85,000) if the bank goes bust.

Mortgage

Buying a buy-to-let property in cash is easy. You don’t need to convince anyone to give you money.

To get a company buy-to-let mortgage you need to be aware of a few things.

We said already that lenders like to see companies that only do property investing.

Another rule is that the loan is at least 75% Loan-to-value. This means that if you’re buying a £100,000 property, you need to put at least a £25,000 deposit.

Moreover, they perform a rental assessment to make sure you can afford the mortgage. This is in the region of 125% of the interest payment.

If it’s a new SPV it will not have any history of its own. Therefore, a credit score and a personal guarantee from the director will be needed.

When it comes to mortgages, having a good mortgage broker is key to getting the best option.

Is it Better to buy Property Buy to Let through a Limited Company?

As a basic rate taxpayer, you are better off buying property in your own name.

If you reach the £50k higher rate threshold, you can buy future properties through LTD Companies.

Buying buy-to-let through a limited company makes sense if you:

• make more than £50,000 a year
• you don’t need the rental income to live on
• you plan on building a BTL portfolio

You can reinvest the buy-to-let earnings and use them for future company purchases.

Then detaching your personal tax situation is powerful too. Taking an income from your company’s property portfolio can happen anytime. That’s once your other income drops or you built your desired property portfolio.

For example, you might take a sabbatical from work, quit work earlier, use it as a bridge to your pension, pay family etc.

I like this rule for higher-rate taxpayers.

Keep existing properties in personal ownership. Buy future properties via a limited company.

Of course, buying property through a limited company is not the ONLY way to invest in property. See my other posts on UK REITs (passive property ownership) and Property Partner.

Whatever you do, make sure you take some professional advice. Property investment involves big sums. It is also expensive to make changes after buying!

Happy property hunting :)

Do you do property buy-to-let through a limited company or personally? Let me know in the comments!

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FAQ

A REIT is a property company that owns and operates real estate. This can be anything from big warehouses to offices, flats or shopping malls.

Fancy getting paid to be the Tesco landlord? Read on!

This monster guide shows everything you need to know about REITs. Here is what it covers:

Some popular portfolios suggest a 10% REIT allocation. For example, Rick Ferri’s Core Four, and Tim Hale’s (Smarter Investing).

Let’s understand why.

What are UK REITs?

UK REITs are property investment companies. They generate profits from owning and operating real estate.

That’s where the name Real Estate Investment Trust comes from.

Investors can buy shares in a REIT. This means they own a fraction of the properties and receive rental income.

Investors can also benefit from the share price increase if the REIT properties go up in value.

To provide some background, UK REITs arrived in 2007. They do make property investing much simpler for the end investor. It’s for this reason REITs enjoy a special tax status.

As long as they can meet certain criteria, UK REITs pay ZERO tax on rental income. They also don’t pay any tax when selling property.

But they must pay out at least 90% of property income profits to the shareholders. This is what makes REITs such a good income source.

If you own shares in a REIT you pay tax based on your tax band. But don’t worry, you don’t pay tax if you hold UK REITs in an ISA or a SIPP (pension). More on tax later.

To sum up, a UK REIT is a great vehicle to own UK property.

But let’s talk money. How much can you expect to make from UK REITs?

Are UK REITs a good investment?

Two things affect how much we can make from owning UK REITs. These are:

1. Rental income
2. Property values

Sure there are lots of other variables. The economy, inflation, interest rates, REIT sectors etc.

But ultimately, it comes down to owning the properties and letting them out for a profit.

As if you own them yourself.

How have REITs performed?

There are dozens of different REITs out there. Let’s focus on the average REIT return first to get an idea. Later in the post, we will see how to pick the best UK REITs.

Luckily, there is an index for tracking UK real estate. That’s the FTSE EPRA Nareit UK Index. It includes UK REITs and real estate companies on the London stock exchange.

During 2017-2021, the UK REIT index has returned a total of 40%, or 6.9% if you measure it per year compounded.

During 2012 – 2017 returns were even better, 100% in 5 years.

Here are the UK REIT returns (top line) for the last 10 years:

And here are the numbers on a graph, plotted against the FTSE UK stock market.

The FTSE NAREIT UK returns came with more volatility, 16.5% vs 13.7% of FTSE UK.

Where’s the income though? If you look at the iShares UK Property ETF, you’ll only find a mere 2.08% yield.

This is because as share prices of REITs increase, the dividend yield falls in percentage terms. The opposite happens if REIT shares fall in price. Overall, the iShares UK property index has returned about 9% per year in the past 10 years.

We will see how to find higher dividend yields later.

Now you might also argue the laggard FTSE UK is not a representative sample of “stocks”. Likewise, REIT is a relatively new concept that started in the US and only spread after the 90s. It only came to the UK in 2007!

What if we take a longer period and go global?

REITs vs Stocks

Here is how US REITs compare to US stocks.

It’s really a tough comparison because you can make a case depending on which period you look at.

Since 1994, US REITs returned 9.63% per year compared to 10.34% of the S&P 500.

At a glance, stocks are a winner not only because of higher returns but also a smoother journey. The standard deviation for stocks was 15.25% vs 19.18% for REITs.

But that’s not the whole story.

If we take a different period, the results are different. Starting from 1972, REITs have actually outperformed stocks.

Not bad for hands-off real estate!

But high returns don’t mean that you cannot lose money in UK REITs. In fact, one of my worries with REIT investing is that REITs behave more or less like stocks in times of stress.

During the Covid crash of March 2020, UK REITs went 30% down on average.

Meanwhile, some retail and leisure REITs, like NewRiver, lost a lot more value and haven’t recovered yet! Others, like Tritax Big Box, did much better, outperforming many of its peers.

So it definitely depends on which REIT you go for.

But owning some REITs may be a good addition to your portfolio. The goal is not just to “make more money” but to do so while reducing risk.

As we will see shortly, REITs can help you to improve your “risk-adjusted returns”. That’s what diversification is all about.

Are REITs a good hedge against Inflation?

In theory, property is a “hard asset” and should do well in times of inflation. And it did.

In fact, REITs proved to offer good protection against inflation.

The last time we had high inflation was in the 70s. Prices went out of hand. Because of that, the governments had to raise interest rates to control inflation.

Here are different asset returns from the 70s (US-based):

As we see above, REITs did well during the inflation of the 70s.

During 1972-1979, the FTSE NAREIT All Equity REITs Index returned an average of 10.64% per year. This beat the 8% inflation and did better than bonds and the average stock.

Most recently, inflation spiked higher in 2021 after the government boosted the sluggish covid economy. In 2021, US REITs returned 28.9%, and UK REITs 41.30%.

REITs also performed well during the 40s when we had high inflation too, albeit not as much.

This makes sense because property owners can pass on the inflation cost to tenants. They raise the lease prices.

Also, in a booming economy, there’s a higher demand for space. REITs benefit from that too (which leads to higher inflation).

Building a portfolio to hedge against inflation is not the main focus of this post. But in inflationary environments, real estate and commodities tend to do well.

If history is any guide, real estate will continue to perform in times of inflation. Higher interest rates will make their debt more expensive. But on the other hand, inflation will “kill” the debt at the same time.

Should I add REITs to my portfolio?

You can add REITs to your portfolio to provide income and reduce risk.

It’s not that stock and bonds are not enough for a balanced portfolio.

It is, however, about adding an extra element of diversification as part of your risk-on portfolio. The benefits are marginal as we will see below.

REITs are worth considering if you are thinking of investing in property.

I know that some people think of real estate as a more tangible thing than stocks. They also like the dividend income.

REITs can offer property exposure, inflation protection and income.

They are known as equity market diversifiers.

This is the case for other ’tilts’ like value and small-cap stocks.

History suggests having a 10% REIT allocation can improve returns while reducing risk. That’s in line with Tim Hale’s recommendation in the Smarter Investing book.

Here is what happens if you add 10% REITs to a stock portfolio.

As you can see, adding 10% REITs to a Stocks portfolio helped improve returns (10.41% per year) while reducing risk. In other words, the standard deviation with a REITs tilt is the lowest of all 3 portfolios.

Moreover, that’s in line with Morningstar’s research on REITs.

Morningstar suggests the best REIT allocation is somewhere between 4-13% of your portfolio.

Now if you want to add REITs, which asset do REITs replace? After all, the allocation has to come from somewhere.

Given the risky profile of REITs, they have to be part of your aggressive portfolio.

That is to say, REITs should take a chunk of your stocks allocation, crypto or buy-to-let property, not your bonds and cash.

This is because you should expect stock-like declines if you own REITs! It is a bumpy ride.

High returns without volatility would be the dream of every investor. Unfortunately, you can’t have one without the other.

To sum up, the role of REITs in a portfolio is to:

• Invest in property
• Increase your income
• Reduce risk coming from stocks
• Protect from inflation
• Get better tax treatment than Buy-to-Let

To quote Rick Ferri:

Commercial real estate is about 13% of GDP but only represents about 3% of the stock market. Investing an extra 10% in property REITs increased the allocation in commercial real estate closer to its weight in the real economy. Some people say the correlation between REITs and the rest of the market is too high to consider it a separate asset class. That’s a matter of opinion. I fall on the side that says real estate is a separate asset class from common stocks and at times the correlation with stocks are quite low and even negative

Rick Ferri on Bogleheads

So these are the reasons why you should add REITs to your portfolio.

Personally, I like UK REITs for the high yield they offer.

It's a nice feeling to see the dividends land on your broker account. 

An even nicer feeling is when you buy REITs at a discount. We will see how to do that later.

Having said that, I have concluded that skipping REITs is not a deal-breaker and won’t make a big difference if history is any guide.

How to invest in UK REITs?

The simplest way to invest in UK REITs is to buy their shares using your online broker account.

You can buy UK REITs using one of the following online brokers:

• Hargreaves Lansdown
• Halifax Sharedealing
• iWeb
• Interactive Investor
• Interactive Brokers
• X-o

You can first check with your existing ISA or SIPP provider if you have one. Most likely, they will support owning REITs.

I am surprised FreeTrade has not added support for REITs in an ISA yet. This is coming in 2022.

Are REITs better than rental property?

Should you invest in buy to let property over a REIT?

Why invest in rental property if REITs exist? Is buy-to-let a better investment than a REIT?

It depends on what type of investor you are.

When REITs are better than Buy-to-let

REITs provide diversification because they hold many property units across different locations.

Commercial REITs, which are more common than residential, offer a reliable income stream. This is because companies sign long leases of at least 5 years and typically longer.

Those rents end up in investors’ pockets as dividends.

Then armchair investors like myself can buy and sell anytime at a click of a button. Moreover, if you find a better opportunity or want quick access to your cash, you can do that with REITs.

REITs provide flexibility, liquidity, and diversification. In contrast, all these are missing from the traditional rental property route.

REITs are better than buy to let property if you want to be completely hands-off and want access to your money at all times.

REITs are also better than rental property if you want to start with a smaller capital.

For example, the average UK property costs £281,000. New property investors may not have a £75,000 deposit handy to get a BTL mortgage. Or maybe they do but are not willing to commit that much in a single location.

Last but not least, UK REITs offer massive tax advantages if you own them in an ISA or a SIPP!

That’s because the UK REIT does not pay company tax on rental income or capital appreciation. You don’t pay any tax in an ISA or SIPP either!

As a result, UK REITs are much better than Buy-to-let from a tax point of view.

Rental property advantages over a REIT

When is buy-to-let better than owning REITs?

If you are an experienced buy to let investor you might want to consider buying property instead of a REIT.

The first reason is that you can add value.

For example, you can purchase a buy-to-let property to fix it up or expand it.

Second, converting a property into multi-occupancy (HMO) is another way to add value. Adding more tenants can lead to higher rents.

Third, doing repairs yourself can cut costs and improve your profits. Instead of outsourcing to a letting agency you can self-manage your tenants.

You can’t do that stuff in a REIT, because you are not the manager, only the owner! Plus you have to accept their fees. Your voting power is very limited.

With you being your own boss comes great power. You can negotiate harder, find bargains and outsource tasks only if needed.

Here is a short summary:

Overall, REITs can offer certain sector characteristics that you can’t find elsewhere.

On the other hand, if you want full control in your hands, you can’t beat good ol’ buy-to-let.

Fancy owning warehouse units or becoming Sainsbury’s landlord? Or how about owning healthcare properties let to the government?

You can do that in a REIT. For instance, Tritax Big Box, Supermarket REIT, Primary Healthcare Properties respectively.

In the next part, we will see how to buy the best REITs.

Best UK REITs to invest in

How do you find the best UK REITs to invest in?

People like UK REITs because of the high income they pay out to shareholders. Here is a list of high-income UK REITs:

• Real Estate Investors plc – 9.87%
• NewRiver REIT plc – 8%
• Regional REIT Limited – 7.5%
• AEW UK REIT – 6.9%
• Alternative Income REIT  – 6.8%
• Civitas Social Housing Plc – 6.31%
• Target Healthcare REIT – 6.26%

And here’s a list of the BIGGEST UK REITs sorted by size (market cap):

• Segro Plc (~15.5bn)
• Land Securities Group plc (~5.7bn)
• British Land Company Plc (~4.8bn)
• Tritax Big Box REIT Plc (~4.5bn)
• Unite Group Plc (~4.2bn)

Now obviously, getting paid high dividends from UK REITs is important. But income is only half the picture.

High income does not mean this is the best REIT!

After all, why would anyone invest in Segro REIT (2% dividend) in a world where an 8% REIT exists?

Investors are rational. Like you and me, they don’t like leaving money on the table.

High dividends are not the only thing to look at. What are some key metrics to know if a REIT is a good investment?

How to tell if a UK REIT is a Good Investment

In this section, I will explain how investors can analyse if a UK REIT is a good investment.

These are the most important metrics when looking at a REIT:

1. Dividend yield
2. Price to Book
3. REIT Sector
4. Company Management
5. Fees
6. Loan to Value

1. Dividend yield

Income is probably the main reason people invest in a REIT.

In a low-interest-rate world, REITs can offer attractive dividends.

Remember, UK REITs must distribute at least 90% of their rental profits. This means investors can earn high dividends assuming that tenants pay their rent.

The easiest way to find out about the REIT dividend is to look it up on Hargreaves Lansdown or Dividend Max.

Here is an example of the Ediston REIT, offering a dividend yield of 5.57% per year.

The dividend yield is a percentage. It works like the common stocks.

As the share price increases, the yield will fall, all else being equal. Similarly, when the share price drops, the yield goes up.

Bigger REITs that focus on growth pay low dividends. But compensate when the share price increases.

High dividend REITs though have little room for growth but you know what you’re getting at any time.

Dividends are nice, but how volatile are they?

Looking at dividends from previous years definitely helps.

Again, on HL, scroll down to the “Annual Dividend History” table.

This way you can get a taste of previous dividends and their dividend cover.

The Recent Dividends tab will show you how often REITs pay dividends.

Dividends are not guaranteed and can vary over time.

During the covid crash, many retailers closed shop. This meant that REITs focusing on high street saw their dividends cut or delayed.

A very high dividend (think 8%+) might be a sign of trouble. That’s because it usually comes with a big drop in the share price, often for a reason!

2. Price to Book

This is the most important metric to tell if the REIT price is good ‘value for money’.

Price to book is a ratio that shows how cheap or expensive the REIT is compared to its “book” value.

In fact, it’s a great way to measure if you are getting a good bargain.

The Price is the share price at any moment in time.

The Book value sometimes called “Net Asset Value” is the value of all its properties combined.

It’s assets minus liabilities. In practice, it’s what the REIT is worth if it sold all its properties in the market and paid back the mortgages too.

REITs are expected to track their Net Asset Value over time.

Here is a graph of the Standard Life REIT. The blue is the share price and the pink shows the Net Asset Value per share.

As you can see, the share price (blue) tracked the property values for a long time. In fact, it was even trading at a premium for some time.

Then COVID happened! Investors overreacted and dropped the price by A LOT. As a result, the share price was half the Net Asset Value per share!

A 50% discount to NAV. You can actually see the NAV Premium/Discount on the HL website at any time.

You can also calculate the Price-to-book value yourself. Divide the Share Price by the Estimated NAV (NAV per share).

Price to book = Share price / NAV per share

In this scenario, Price to book = 80.10p / 100.40p, so about 0.8 which is roughly a 20% discount to NAV!

What do we learn from all these?

We learn that for various reasons investors are willing to pay a different price.

A well-respected REIT will trade at or above its net asset value. This doesn’t mean if it ever drops below that we should not consider it.

But a REIT that always trades at a discount tells you that something is off. It might continue to do so for a long long time!

This brings us to the next point: Type of REIT.

3. REIT Sector

REITs often specialise in certain market areas.

UK REITs operate in the following sectors:

• Offices
• Retail
• Industrial units
• Logistics
• Warehousing
• Healthcare
• Residential
• Student accommodation

REITs develop an area of expertise and have a certain strategy.

The REIT type can reflect how reliable the income is and what investors are willing to pay for it.

Universities and state departments sign long leases. They are also more reliable than say retail shops and restaurants.

In the online shopping boom of COVID, logistics and industrial REITs outperformed.

Likewise, city centre flats, offices and high street dropped.

Investor sentiment can, of course, change over time. It’s what makes REIT investing so interesting.

The share price always reflects that. We saw before how the share price can drastically diverge from NAV!

As a result, this can lead to opportunities.

Some REITs operate in more than one sector. You can find the REIT sector breakdown on their website or on their annual and interim reports.

For example, here’s the latest sector breakdown of the BMO BREI REIT. I copied it from their half-year 2021 report.

As you can see a REIT can operate in more than one sector.

4. Company and Management

When valuing REITs, you should take the company history and management into account.

Good management will both communicate well and execute the strategy well. In times of stress, they will change direction and skate where the puck is going.

If you want to dive deeper into certain REITs follow their RNS updates for some time.

I do like to read them in an old-fashioned way on LSE.co.uk. Here are the SLI REIT announcements, for instance: https://www.lse.co.uk/rns/SLI/.

Are they promising the world? Mistakes happen. Do they own their mistakes?

Do the management always want to please investors but fail to execute?

Does the management have ‘skin in the game’?

For example, you often see RNS updates for management that purchased shares in the REIT. This is mandatory thanks to regulations.

It can be a good sign to see the management backing up the company with their own money.

This applies to all companies, not only REITs. It’s the “owner-operator” model!

Other questions to judge a REIT are the following:

• Has the share price traded mostly at a premium or a discount to NAV?
• Is the dividend amount rising every year?
• Are there sudden drops to the share price or is it a smooth ride?

Read the annual or interim reports from the REITs website. LSE can be quite dry sometimes!

5. Fees

REITs charge fees for running the fund and managing the properties. REIT fees typically are in the range of 1-2% per year.

Management costs are different from one REIT to another. You have costs like salaries, bonuses, office costs, and property management.

REITs have no fixed operating costs. Although you can get a feeling from the Total Expense Ratio (TER%) you can dig further into the annual reports.

6. Loan to Value

The max loan to value a REIT can have is 50%.

The higher the loan to value the higher the risk. This is because a bigger LTV means that if property values drop, the REIT will need to sell assets to pay back the bank!

If this is done in a forced sale, an over-extended REIT can spiral out of control.

Also, higher debt makes the REIT more sensitive to interest rate rises.

As interest rates rise, an overleveraged REIT gets in trouble. It becomes worse if the sector is declining, like high street shops.

Again, bankers want to see a maximum LTV threshold. If the REIT breaks the covenant they will demand payment!

REITs can fail if they cannot secure financing. Intu is the most popular example where investors lost their money. They used to own UK shopping centres and failed in 2020.

I’d say REITs with LTV > 40% are riskier. But it also depends on the sector they operate in. A high LTV in social care homes funded by the government is not the same as a shopping mall REIT on the same LTV.

These are the most important metrics.

Depending on the REIT you can look at other metrics such as these.

• Vacancy rates
• Rent collection
• Footfall (in case of retail shops)
• Weighted average unexpired lease term

Michael’s View on REITs

The point is not to choose specific names I have chosen. After all, by the time you’re reading this article my REIT selection might have changed.

Always do your own research. Investing in these names does not guarantee any gains and I am not liable for any losses. I could be completely wrong in my analysis. With the disclaimers out of the way, let’s go.

My view:

It makes sense for me to generate some income from REITs. This is as part of my Limited company investments.

In 2021, I started allocating some money to undervalued UK REITs as I had mentioned before.

That’s still in line with my property investing strategy. In terms of allocation, property is still 15% of my total asset allocation. I didn’t want to add more to Property Partner until the path becomes clear after the US acquisition.

I particularly liked the cheap prices UK REITs traded at. And still are. These are smaller REITs with above-average dividends.

On the REIT front, I opened positions in Standard life Property Investment Trust REIT (SLI), BMO BREI and Hammerson (HMSO). SLI and BREI have performed better than I expected since I bought them. They’re still playing catch up with an increasing NAV.

Should the price reaches NAV or the situation changes, I will reassess.

HMSO is a purely speculative play, It owns many retail shops such as the Bicester village. Management history is terrible, plus it was down -80% after COVID. It’s a risky situation, in debt and selling assets.

That said, ‘Everything has a price‘ they say. New CEO and the strategy is changing.

Two more REITs I’m watching are the Schroder REIT (SREI) and Ediston Property Investment Co Plc. SREI’s top 3 tenants are two universities and the secretary of state 🙂

The latter (EPIC) is a retail park owner. It has a relatively stable NAV and paid dividends throughout the pandemic.

With the exception of Hammerson, all the above REITs are all small ones (£150-300m),

This has the added benefit of being a good acquisition target. This recently happened with Mckay Securities, shooting the REIT up by 30%.

What are some good REIT Resources?

REITs take time to study.

But I like to read about them and the market in general. Are the offices back? Why are Grade A offices suddenly in high demand? How will rising interest rates impact commercial real estate?

What’s going on with retail footfall vs 2019? Are rent collections improving as COVID becomes endemic?

Here’s what I occasionally read to stay up to date with REITs and trends:

• REIT announcements (RNS)
• REIT annual and interim reports
• Knight Frank research library and Savills
• Market updates on Twitter

I particularly like @dopamine_uptake. He provides very useful research and updates.

REIT ETFs

If standalone REIT research is too much for you, you can always look at a diversified REIT ETF.

Here is a list of various REIT ETFs together with the index and fees:

How do interest rates affect REIT prices?

As inflation is rising, interest rates are on the rise too.

Will higher rates affect the REIT prices and their returns going forward?

Yes, like all risk assets, high-interest rates are a drag on their present value.

This is because interest rates represent the risk-free rate of return available to investors. As a result, interest rates affect the relative value of other assets, including REITs.

For example, if you can suddenly earn 5% in the bank, why take the risk of investing in REITs?

A sudden hike in interest rates would lower the price of risk assets. More people would sell them as they are not as attractive as they used to be.

High-interest rates also make your mortgage more expensive.

REITs may have some fixed debt (and rental income). But eventually, the fixed period ends. As a result, REITs will have to pay more for holding debt.

Higher interest rates would dampen the property value growth too.

As Buffet said, interest rates are like gravity in valuations.

The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates. The higher interest rates are, the less that present value is going to be. Every business, whether it’s Coca-Cola or Gillette or Wells Fargo — its intrinsic valuation is 100% sensitive to interest rates.

Buffet 1994

Looks like the current high inflation (5.5% UK as I’m writing this) will change rates. But there’s a massive difference between a “high rate” of up to 2% in 2024 and a 15% rate like the 70s.

Now I’m not sure if rates will go much higher. Noone can predict interest rates, they are impossible to predict.

In 2021 we saw inflation spiking. This caused the Bank of England to start raising interest rates. UK REITs returned 28.9% in 2021, again proving that inflation did not affect their prices by much.

If inflation stays high, rates should go up. But at the same time, high inflation “kills” the debt REITs hold which should benefit REITs.

But then property values must go down or at least stop rising by as much if rates go up. That’s what theory says.

Basically, it’s complicated! This NYU Stern research showed that:

Industrial, Storage, and Healthcare REIT sectors indicate the most interest rate risk, while the Industrial and Lodging sectors display greater equity market risk.

Another paper (Allen, 2000) studied REIT returns. They showed REITs are more sensitive to the stock market environment than they are to interest rate fluctuations.

Individual REIT characteristics influence the riskiness of REITs, like their financial leverage, company strategy and type of assets.

Of course, no one can predict where interest rates go from here. 10 years ago, people said they can only go in one direction: UP. But this didn’t happen.

I like REITs that are not overleveraged and on a healthy balance sheet. They should be able to weather the rate hikes as other risk assets do.

Those with high LTV (40%+) will struggle, particularly if property values decline.

Now I don’t think the Bank of England will raise interest rates high enough to crash the UK property market. Consumers are so in debt to the housing market. Crashing it would mean a recession.

After Brexit and Covid, I don’t think there’s much leeway for hurting the economy. Sadly, even though property prices are not as affordable as they used to be, I don’t see that changing.

How are REITs taxed in the UK?

UK REITs come with great tax advantages.

REITs don’t pay tax on the rental income. They don’t pay tax when selling property either!

But they must pay out at least 90% of property income profits to shareholders.

Do shareholders pay tax on the dividends received or share appreciation? It depends!

Tax on REITs in an ISA or Pension

You don’t pay tax when holding REITs in an ISA or a pension.

Dividends received are tax-free in these wrappers.

But don’t forget that as the REIT grows in value, your shares may increase too. If you sell the REIT shares for a profit, you won’t pay tax in an ISA or a SIPP.

Overall, REITs have an amazing tax advantage over UK buy-to-let property.

How are REITs taxed for Limited Companies

The gain from selling your REIT shares (capital appreciation) is subject to corporation tax (19% – 25%).

What about REIT dividends for limited companies?

Even though REIT dividends are called ‘dividends’ they are misleading.

Limited companies normally don’t pay tax on dividends received. However, REIT dividends are special.

They come in 2 types:

1. Property Income Distribution (PID)
2. Standard Dividends

Standard dividends are not subject to corporation tax, like other dividends.

But PIDs are subject to tax at the corporation tax rate.

Even though a LTD company is eligible to receive gross PID dividends and pay tax later, some online brokers might withhold 20% of it at source.

Tax withheld is what the REIT pays to HMRC on behalf of the shareholder. But it’s what applies to individual investors, not companies!

But anyway, speak to your online broker and seek a gross payment if possible. Interactive Brokers withhold 20% tax and say they can’t change it.

How are REITs taxed in General Investment Account (GIA)

If you hold REITs outside an ISA then you need to pay tax on it.

PID Dividends are taxed as income, like buy-to-let rental income for example.

You pay tax depending on your tax band. For example, higher rate taxpayers would pay 40% tax on REIT PID dividends.

Standard (non-PID) dividends, on the other hand, are taxed as normal dividends are. So a basic taxpayer pays 7.5% dividend tax. A higher rate pays 32.5%.

But thankfully, HMRC offers a tax-free dividend allowance for the first £2,000 of standard dividends.

The dividend tax will increase by 1.25% from April 2022.

But dividends are one part of the gain. The rest can be capital gain if shares go up in value as properties appreciate.

If you sell REIT shares in a general investment account then you pay capital gains tax on the profit. The first £12,300 of profit are tax-free in every tax year!

Should REITs be in a LTD company or in an ISA?

From the above, we can tell REITs are better owned in an ISA or pension if possible.

ISA always wins because the dividends are received gross and are tax-free. And so are the capital gains if you sell the REIT shares for a profit.

I hope you enjoyed this UK REIT guide.

Happy REIT Investing!

Check out other property posts and the Company Investing Academy, where we talk about REITs and property investing.

I really enjoyed talking to Rob about the current state of the UK property market. We also discussed hot areas to invest in and the challenges smaller investors face.

Rob shared his productivity hacks and his unconventional “digital nomad” lifestyle! Enjoy.

Thanks for watching!

Check out some other interviews here.

Although now an older article, it can still describe well what Property Partner is all about. In one sentence, it is a digital property crowdfunding platform where anyone can invest in buy-to-let in various UK locations.

The recent news prompted me to write about Property Partner which I kept putting off for a while.

Property partner has been acquired by a US company, “Better”!

Better is a much bigger company that offers mortgages, insurance and more. They operate in the US but through Property Partner, they now want to offer US and international properties to UK investors. Sounds promising!

Key changes from 1st October 2021:

1. Fees dropping from 1.2% to 1.0% per year. If investing more than £25k the same 0.7% fee remains
2. Scraping the £1.20 per month account fee
3. Dramatically expand new investment opportunities on the platform (US and international)
4. Improve mortgage financing on properties to enhance investment returns for all clients
5. 2-4% investor cashback for providing liquidity

I’ll share my views on these changes below.

1, 2. Property Partner lower fees

Performance comes performance goes, fees never falter.

You can argue that a big reason the secondary market trades at such a big discount is that more people want to leave the platform than join due to loss of trust after Property Partner introduced new fees and the way they did it.

Lower fees are always welcome.

PP investors currently pay an annual fee depending on the invested assets in the platform. This is now changing to:

• less than £25,000: annual fee = 1.2% -> 1.0%
• more than £25,000, annual fee = 0.7%

For a £25,000 investor, the fee is now £250 instead of £300. Add the removal of the monthly account fee (£1.20) and we’re paying £64.40 less a year. Not a life-changing amount but I’ll take it.

Above all, it also shows the intention and a path in the right direction.

Yes, I want to see more of that.

3. Property Partner offers US and international property

I think the expansion to US and international markets is a really interesting one. I’m not sure whether the “international property market” will include the EU as well but I hope so.

I keep saying that I’m not very optimistic about the UK property market. The pond is too crowded. It keeps defying gravity and proving me wrong 🙂

But it’s not a zero-sum game. I would love to see both the UK and say, Germany or Greece do well. I would love to have the option to invest in the Greek market in a one-click fashion like I’m doing in the UK. The high prices in the UK have dropped the net yield from rent. As a result, it’s much harder to get a high income-producing portfolio.

A BIG benefit of this approach is that we will have the chance to invest in NEW LISTINGS. This means new opportunities and fresh new properties on the platform.

I haven’t seen a new deal in ages, apart from the development loans. So overall, I welcome this change.

4. Improve mortgage financing

Better offer homeownership products and services. It looks like Property Partner can greatly benefit from Better mortgages (sorry, couldn’t resist!), effectively making it a win-win between their platform and the end-investor.

This has been a hot topic during the PP premium client meetups I attended pre-COVID.

Since PP owns such a big property portfolio (>£100m) why can it not negotiate better terms with the banks? They must do something which can result in higher investor returns.

After the integration with Better, I am glad it’s on the table.

5. Offering 2-4% cashback for buying on the resale market

Basically, Property Partner are paying you to buy shares in the secondary market. We all know liquidity is dry there, and that bigger investors have trouble buying or selling without moving the market.

This incentive will hopefully improve things.

If you invest more than £10,000 per month then you’re eligible for a cashback.

• £10k – £20k -> 2% (max £200)
• £20k – £50k -> 3% (max £900)
• £50k – £250k -> 4% (max £8,000)

Example: If I buy multiple properties for a total of £30,000 value in the secondary market, I will be paid £900 to do so. Do not forget there’s a 1% fee when buying in the resale market. When taking that into account, the total cashback is £600.00.

Again, not a bad idea to incentivise investors to bring the resale market back to life.

Property Partner investing in a post-COVID world

Properties are valued every 3 months by an independent market surveyor. For a long time, properties trade at a much bigger discount (10-20%) to what the surveyor says they’re worth.

As with any financial market, it is not the locked AUM that set the price, but the direction of flows.

In plain English, more people want to sell than to buy in Property Partner. This can dramatically drop the price even if the sales taking place are only a small fraction of the overall invested amount.

Right now, it is a buyers market. Sellers have to really offer a discount to incentivize the buyer. There is no meet me in the middle.

The secondary market is on sale for quite a while. Selling relies on other investors buying in because for every seller you need a buyer. At the same time, independent surveyors value the properties at a much higher amount than what buyers are willing to offer. Who to trust?

So there is a big gap.

Who to trust? The resale market or the independent surveyors? Perhaps the resale sellers are knowingly wrong but this is what they are willing to pay to exit the Property Partner platform! However, there are some properties that trade at a premium!

Such as this Aberdeen university block of flats which has an almost-guaranteed rent leased to the university, despite uni properties being the last thing investors want.

So I don’t know, but here’s how I go about it.

Resale Market VS the Open Market

Luckily, Property Partner has existed for more than 5 years. As a result, some listings are now due for an ‘exit’. PP have to go to the open market and sell the properties.

Eventually, it is the open market that will decide whether resale investors are right or wrong. Wait until the 5-year exit mechanism kicks in, and see what the properties actually sell for!

Given the depressed secondary market prices, I would expect to see losses when selling at the open market.

But on the contrary, the latest selling records show that when Property Partner sells at the open market it has achieved a 25.4% total return for 5 years, so 5.2% per year after all fees and taxes (Sept 2021).

Here is the selling record, sorted from earliest to latest.

PP started listing properties in 2015, so most sales have taken place in 2020-2021 (5-year exit mechanism). You can also click on individual properties and find out more details in the description.

25.4% total return gives me hope! This total return is also based on initial listing prices. These were much higher than the depressed resale prices we see today. So all else being equal, returns should be higher for the “late” investor.

I also think PP shoot themselves in the foot by advertising the Resale market index first thing on the homepage.

As an investor, I don’t really care how much I can sell my properties in the secondary market right now. I mean.. ok, that’s good to know, but I’m more interested in what the actual value of my properties is in the real world.

See what I’m talking about, Resale market index below:

Property Resale Value index

And now look at the Independent Property Valuation picture which is NOT showing by default. This is basically what really matters as a long-term property investor.

Even worse, the Resale market does not show the total return I’m getting, half of which is typically dividends!!! See the selling record, dividend return is 13.0% out of the 25% total return.

As of their latest July report, average annual dividends are now 4.6% (3.6% after fees if you are investing <25k, 3.9% if >25k).

Not all properties are made equal

Even the Independent Property Valuation doesn’t paint the whole picture because it’s an average view.

Post-COVID everything has changed.

We have 2 kinds of properties. Those impacted by COVID (Purpose Built Student Accommodation (PBSA), city centre flats no garden) and those that are not. PP has a big chunk of university accommodation which is depressing the average index.

I would be much more interested in viewing the non-PBSA index and see how the other properties perform in aggregate. That will tell me whether Property Partner tracks the UK property market well which in total, has been doing well.

In any case, seeing positive numbers when waiting to sell at the open market is good news for me. Property should not be traded in/out every year. This is also what people do with the traditional Buy-to-Let. They hold on to it for at least 5-10 years.

Overall, these are the stats I’m interested in and in the following order:

• How much has Property Partner made for investors over time (based on RICS valuations and actual sales if possible)
• What is the non-student-accommodation property price index
• What is the resale market value over time (the current PPX All-share index)

The last time they had reported the Total return for investors, was in March 2020 and without taking Covid revaluations into account. That was 5.7% per year.

My personal stats

When it comes to picking properties you can say that I’m a terrible investor (or just say unlucky ;) )

In my personal portfolio, in November 2019, a few months before COVID I wrote:

As of end of 2019, the average return since Property Partner launched (2015) is 6% per year if properties are sold as whole units. However, if we follow the intended method of sale, which is to sell units one by one, then Property Partner has achieved a 9.6% total return since launch. That’s a big if, but Property Partner has already managed to sell 4 properties so far.

November 2019

It’s nice to see that this is actually happening. More and more unit blocks are being sold as separate units to either enhance the property balance sheet or pay down the mortgage.

Judging from their selling record, 23 properties have now been either sold or offer-agreed.

They typically buy in bulk and then offer higher “break-up” value to investors.

I also wrote:

My personal returns are 5.67% after fees so around 6.5-7% before fees in the last 12 months.

November 2019

Post-COVID, the picture is pretty bad! 1/3rd of my portfolio is university accommodation so overall I am down 8% in total! This hurts and I am not sure if / when the PBSA situation will improve.

Excluding my university investments, my personal returns are 3.2% after fees. If we include my development loans, then my portfolio is up 5.7%.

Speaking of which, I think the development loans have had a good run and are not getting enough attention. I know some people who only invest in development loans.

University accommodation investing (PBSA):

The love for the sector comes because as an LTD company investor I prefer a dividend-heavy portfolio. The tax advantages are just massive. See my previous post on How taxes work at Property Partner.

You might be one of the lucky ones that invested in Aberdeen PBSA where Robert Gordon University guarantees the rent. The rent is even linked to RPI inflation so goes up every year! As if that’s not enough, the property was revalued to 2m, an 8.1% increase.

I will continue to collect the rent from my university accommodation, which surprisingly some universities pay. For example, the PBSA in Newcastle-upon-Tyne has actually increased the dividend from 4.0 to 4.5% and it’s currently trading at 0 discount/premium.

That’s not the case with my Bangor, Wales PBSA which has been a disaster (-47.55%).

At least the development loan in my portfolio compensates for that. 9.5% annual return, partially repaid and progressing.

One thing to note on Property Partner pages: The dividends (rent) is now being quoted AFTER fees which is nice.

Is now a good time to invest with Property Partner?

There are some big discounts in the property resale market that can prove to be good investment entry points.

If those discounts are real, meaning the properties can sell at their RICS valuation then things look good.

Having said that, I would like to see how the Better acquisition will play out before investing. I want to see what kind of new properties will bring to the platform and how they will communicate/treat investors.

Perhaps if you are willing to allocate a certain amount to property, add a percentage to Property Partner and gradually enter or exit accordingly. It is what I have been doing with my experiment.

Some people were hesitant to invest with Property Partner because it’s a small company with an uncertain future. I believe PP will be in a much better position financially speaking now that is backed by such a huge US company with plans to go public in Q4 2021 ($7.7bn valuation).

Also, Better have just bought another UK company, Trussle, which is a popular UK mortgage provider. I’m sure there are synergies at play again here.

All things considered, if you want full control of your properties then you can’t beat the traditional buy-to-let route. It’s just not for me, not yet at least :)

As always, I cannot provide any advice and you are responsible for your investment gains and losses respectively.

It has been a tough ride! Perhaps you, like me, have invested in university accommodation and are experiencing losses too. Especially in a booming property market that’s not great to see!

It also shows the power of diversification. Property makes up about 15% of my portfolio. Invest in multiple assets, regardless of how confident you are. Covid is a bright reminder that not everything can be known upfront…

Other property choices can include the traditional Buy-to-let route which gives you the ultimate control or REITs. I have previously mentioned Real Estate Investment Trusts where you can get exposure to commercial property managed by a team of experts. They are also completely hands-off (except the research part!) but more highly correlated with the rest of the stock market.

Right now some UK REITs trade at big discounts to their net asset value, like BMO BREI, Standard life Investment trust (SLI) and SREI that pay dividends.

All things considered, I see the Property Partner acquisition as a good thing. Lower fees, liquidity improvement and more property choices. Whether what’s promised is delivered remains to be seen…

Until then, I want to hear from you… How has your Buy-to-Let or PP portfolio performed? Are you doing something different, perhaps Airbnb? Are you happy with your property investments?

On a related note, I believe it is a good time I interview Property Partner and clarify some of the above and their future plans. What would you like to ask? Post your questions below.

As a reminder, if you want to support this blog consider signing up to Property Partner using my affiliate link. Helps me and the blog to keep going. Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!

Andy is also the founder of Plain English Finance, a company with a great mission: to improve the financial affairs of as many people as possible.

The interview is split into two parts, here is the first one on YouTube: 

https://www.youtube.com/watch?v=w49frSoZk4Q&ab_channel=FoxyMonkey

Part 1

Topics we talked about:

– Investing at all-time highs like today
– Why property is overrated
– How aggressive/defensive you should be depending on your age
– 50k Weddings
– The real inflation behind government numbers
– Crypto
– Biotech
– Plain English Finance

Part 2

Part 2 is all about crypto, biotech and Plain English Finance.

Youtube link: https://www.youtube.com/watch?v=W8uNs8uALUA&ab_channel=FoxyMonkey

With the recent changes in buy-to-let taxation, many people consider buying property through a limited company.

But what if you own a buy-to-let already? Is it too late to do that?

It’s not always clear whether you should own property through an LTD company. If you are a higher rate taxpayer, a LTD company is much more attractive from a tax point of view. That’s because:

1. The rent is taxed at a 19% to 25% corporation tax, much lower than your 40% or 45% income tax.
2. The mortgage interest is 100% tax-deductible for LTD companies. This stopped being the case for personal BTL investors. They only get a 20% ‘tax credit’.

So if you rent out a property (personally) for £1000 and half of that goes to the mortgage, HMRC will tax you on the entire rent. As if you received it, even though some of it went to pay the mortgage.

That’s not to say we should always use a LTD company. Generally, mortgages are more expensive for corporations. There’s also the extra hassle and accountancy cost for LTD companies.

As a general rule of thumb:

Buy new properties through a LTD Company but retain existing property under personal ownership.

But, I digress! This is a post about whether it’s possible to transfer your property to a limited company.

If I own a BTL property can I move it to a limited company?

When you transfer property ownership to a LTD company there are many issues to consider, such as tax, early redemption fees, administrative and legal fees. But let’s focus on the most important one: tax.

Despite you owning the LTD company, you have to sell your property to your company. In the eyes of HMRC, you and your limited company are two different entities.

This has certain implications:

a) The LTD company has to buy the property at the open market value
b) Stamp duty tax the company needs to pay
c) Capital gains tax (CGT) you need to pay
d) For residential properties priced more than £500,000, the company would need to pay Annual Tax on Enveloped Dwellings

The a) is straightforward but affects the amount of tax we might pay in b) and c)

Regarding stamp duty tax, the company would still need to pay it at the additional rate. There are no exceptions.

But can I defer the capital gains tax when transferring property to a LTD company?

When it comes to capital gains tax, you need to pay it as per the standard CGT rules. So if you bought the property for £300k and you now sell it to your company for £500k (open market value) you will pay capital gains tax on the £200k gain. Most of it will attract 20% tax. Ouch.

However, you might benefit from an old legislation, the “incorporation tax relief” (section 162, TCGA 1992). HMRC defines it as:

If you, either as an individual or in partnership, incorporate a business by transferring the business, together with all the assets of the business, in exchange wholly or partly for shares, you can defer some or all of the gain arising from the disposal of the ‘old assets’ (the business and the assets of the business) until such time as you dispose of the ‘new assets’ (the shares).

In plain terms, when transferring property to a limited company, the capital gain from the sale can be deferred in exchange for a reduction in the base cost of company shares. However, to do that, the buy-to-let has to be run as a business.

What does ‘run property as a business’ mean?

Running it as a business, as opposed to a passive income vehicle is a bit tricky to define. There is no statutory definition for a business.

There was a case back in 2013 (Elisabeth Moyne Ramsay) where the coupled transferred a block of flats to their LTD company. The capital gain was not paid but it was deferred (in exchange for company shares) for when the property is sold. This is what incorporation tax relief is about. HMRC demanded capital gains tax payment and the couple appealed to the first-tier tribunal. FTT made a decision in line with HMRC and asked them to pay the capital gains tax. The couple then appealed to the Upper tax tribunal which decided in favour of the couple.

This couple which eventually won the case was working 20 hours a week on the block of flats and that was their main occupation. They had no letting agency and this was their main business. UTT indicated that the degree of activity should outweigh what might normally be expected to be carried out by a mere passive investor.

In the absence of clear-cut HMRC rules of what running property as a business mean, I would be extremely careful taking this approach.

HMRC’s own interpretation of the judgment at CG65715, however, does impose a minimum threshold of 20 hours per week, as per the particulars of the Ramsey case:

‘You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business. Other cases should be considered carefully.’

Some questions to ask yourself before you transfer property to a limited company:

• Is this your main source of income and occupation?
• How many hours do you spend per week on the (property) business? More than 20?
• Do you use a letting agency?
• Do you undertake maintenance work yourself?

Before going down this route you may want to seek clearance from HMRC. You can get non-statutory clearance from HMRC on specific transactions.

The decision to incorporate a property rental business is not one to be taken lightly – legal, commercial, taxation, administrative and refinancing issues need to be carefully considered.

This article appeared first in the company investing academy wiki. If you run a limited company consider signing up for the Company Investing Course. Put your business cash to work!

Silently… secretly… inflation limits what your cash today can buy tomorrow.

Here’s the relative value of £100,000 in the past decade.

In other words, if you had £100k in 2010 and checked your wallet again in 2020, you could now buy only £81k worth of 2010 stuff. Inflation had been stealing from you £2,000 per year.

We all remember how cheap stuff was back in the days. And I haven’t even talked about housing yet! For those of us who missed the party, it’s no surprise first-time buyers struggle more than ever now. Last time I checked, the average house price in London was 14x the average salary.

This infographic from BBC nails it.

I’m sure you can find more examples like the above, some more obvious than others (cocktail prices in the City must be one of a kind).

Inflation rates come in different flavours. CPI, RPI, CPIH, Food inflation and more buzzwords. Let’s make things more clear.

What is inflation then?

Inflation is the rate at which the prices for goods and services increase. Sometimes the rate is negative, so prices get cheaper which we call deflation.

In the UK, the Consumer Price Index (CPI) and Consumer Price Index Housing costs (CPIH) are the most popular inflation metrics. They measure the average of all goods in the economy such as food, clothing, shoes and train fares. CPIH includes all owner-occupier’s housing costs for owning, maintaining and living in the house such as council tax. It’s not the cost of purchasing a house.

You can check what inflation rates are at any point in time on the Office for National Statistics website.

Sometimes the Retail Price Index (RPI) is also used but it got replaced by CPI in 2013 because it is biased upwards.

Fun fact, RPI was what my previous rental contract was supposed to use in order to calculate by how much the rent should go up. This just reminded me of the time when our previous landlord forgot to increase it and then tried to backdate it illegally. Aren’t greedy things like these giving landlords a bad rep?

But I digress.

Why do prices keep going up? Why does the government target a 2% inflation rate per year? This is unfair.

Do we really need inflation?

The truth is, it’s not so much that we need inflation, but we are really scared of deflation.

Deflation is really bad in a capitalistic economy. If you know that you can buy something cheaper in a few month’s time then you can wait in order to get more bang for your buck. If everyone waits, then spending is reduced which reduces business profits. This causes companies to lay off workers which reduces spending even more because consumers have less money to spend. This downwards spiral causes more deflation and so on. That’s bad for the economy.

If on the other hand, you have little inflation, you know things are going to get more expensive (“get on the housing ladder!”). Then you better spend your money now while you can afford it. This encourages economic growth and wage growth too. Business is good and can hire more people and increase people wages.

Little inflation, controlled inflation is good. It also makes debt cheaper to pay later on. In nominal terms, the £100 in 2010 is worth £80 in 2020, so repaying debt gets easier with inflation. But if you’re on the receiving end (hint: bonds), high inflation can destroy you. Your coupons are fixed amounts agreed upfront, which is why bond investors are really scared of high inflation and shine on deflation.

Is inflation making me poorer?

You may be saying this is unfair, I feel I’m in a rat race. And you might be right. But as long as your earnings increase at least by the inflation rate then inflation is not making you poorer.

In other words, if you grow your income more than the price increase, who cares what the price is?

Inflation alone doesn’t tell us much. It’s only when we compare it to the average earnings that we see if we’re getting richer or poorer.

Source: tradingeconomics.com

As you can see, inflation and earnings sort of break even. Some employment contracts have clear terms for increasing your salary according to the CPI figures. Unfortunately, not all contracts have such terms, including my wife’s. (I’m looking at you, NHS). Some DB pensions increase at least by the inflation rate, including the state pension.

The state pension currently increases by whichever is higher: CPI, average earnings or 2.5%.

Another reason why you may like inflation is when you have debt. On one hand, property increases in value roughly in line with inflation. If you own property then you benefit from the price increase. But the debt also gets “cheaper”. It’s much easier to repay an £80,000 mortgage now if you took it in 2000. You still owe the bank £80k but the value of £80k is less now than it was in 2000.

I’m oversimplifying here to make a point – there are interest rates on the debt obviously, but even these have been very low for a while now.

Some people still get mad at inflation and I get it. It’s just an average metric. Different people buy different goods and services even if they live in the same area. One thinks life is getting more expensive because transportation and household services are getting more expensive. But one who mostly spends on clothing and food doesn’t necessarily agree.

Here’s the CPIH contributions breakdown of different goods in the past 2 years:

People in the US where health costs have gone through the roof have seen some high inflation in health and education.

So is inflation making you poorer? No, not if your earnings follow the same trend. It can even benefit you if have a mortgage or some other low-interest debt.

How to beat inflation

Inflation is the silent killer of our wealth but we can definitely do something about it.

As you can see there’s not a one-size-fits-all solution to fight inflation. There are assets that have behaved well in the past and are good candidates to protect against inflation like property and gold.

I’m quite sceptical when I hear “governments are printing money and we’ll see hyperinflation”. Sure they’re printing money but this has happened again in the past after 2009. We’re yet to experience high inflation.

Perhaps is the fact that technology is making us obsolete and causing deflation. Or that banks are not willing to lend despite central banks efforts to stimulate the economy. My opinion is that we will not see inflation higher than 3% on average in the next decade.

Those who forget history are condemned to repeat it. Let’s not completely forget about it. Inflation is tricky – governments and businesses are scared of it and we should be too. However, it should not be what drives our investment decisions.

A well-diversified portfolio is your best guess to beating inflation and meeting your needs. What’s your best hedge against inflation? Do you think the Bank of England will be able to meet its 2% inflation target??

I first wrote about Property Partner in 2018. Since this is a new breed of platforms I thought of starting with a capital of £10,000 and topping it up every year.

I always liked Property as an asset class. UK property owners have done very well in the past 40 years. I doubt things will look as rosy in the future but I still want part of it despite the challenging environment.

I certainly don’t want to be 100% stocks/bonds which is why I consider property to be a good alternative.

The reason I invest through Property Partner is simple. Diversified property portfolio across different UK areas with no hassle of managing tenants or sourcing properties. I guess you can do the same with REITs but they focus on commercial properties instead. I also don’t like the fact REITs are highly correlated with my stock investments.

Some history to where we are now

Things started very well with Property Partner. I started investing in 2018 and I was really happy with the fee structure. Basically, a one-off fee on the way in. That was too good to be sustainable.

Then Property Partner increased their fees substantially for smaller investors. From mid-2019 on, you pay 1.2% fees up to £20k portfolio and 0.7% after that. As I reported last year, my personal returns were 6.5-7% before fees but 5.67% after fees in the first 12 months of investing.

Higher fees dropped the appetite and brought dissatisfaction and a feeling of mistrust to investors. I judge from the conversations I had with many of you. Of course, you have the option to sell in the secondary market, but this dropped after the news.

Property Partner wouldn’t exist as a company anymore had they not increased their fees. So I totally get it.

I decided to stay the course because property values hadn’t been impacted so much. It’s frustrated investors who want out that drive the market prices – and that’s understandable.

Just when PP tried to re-build its branding and attract new investments COVID hits. The forced shut-down meant that 8.4m people are under the UK furlough scheme. The government pays 80% of their wages – IF they are not made redundant. I’m sure some people lost their jobs and didn’t get a penny. Others in the gig economy (think your Deliveroo driver) can’t take advantage of the government pay.

Eat or pay the rent?

I’m also sure some people are trying to take advantage of the situation. They ask for rent holidays or reductions without being affected. Like my friend who got a 50% rent reduction for 2 months while still working full-time from home. And which landlord would want a vacant property in this climate?

I’m not sure what to believe though. One report saying that rent arrears have only increased by 3%. Then Citizens Advice found that 2.6 million private renters have already missed, or expect to miss, a rent payment due to the crisis (1st May ’20). And here’s Property Partner’s rent arrears stats as posted in their latest post:

PP has suspended dividends in all properties to make sure each property can pay its mortgage now that so many properties have reduced rent. Suspending the dividends is also a condition by the banks if you want to freeze the mortgage.

Initially, this was only up to March 2020. But now they’re extending it to September 2020. This doesn’t mean that tenants don’t pay the rent. The rent payments for the 70% who’re not in arrears accumulate in each property.

Net income that is earned in the next 3 months will accumulate within each property’s bank balance, for the benefit of that property’s capital reserves and that property’s investors.

Property Partner on the property webpage

Rent accumulates inside each property fund but is not paid out to us.

Suspending the mortgage payments means that the outgoings are also very small for us, investors.

In this climate, landlords get a mortgage holiday for 3 months. Which is also what Property Partner said they’re doing. They have agreed to a mortgage freeze with the banks for the past 3 months and are trying to extend it for another 3 months.

But this is on the condition that the rent is not being paid out to equity holders – us. In other words, the bank says: You can’t pocket the rent while having spare money around.

So how are Property Partner investments performing during the pandemic?

COVID hit the Property Partner marketplace by 12% from peak to trough in late March. This, in combination with the previous fee sell-off, results in the market trading at a -18% discount to the property valuations reported late March.

Coincidentally, this is roughly how much the FTSE 100 is off from its February highs. -16% as of 4th of June that I’m writing this.

Property Partner haven’t given us a clear picture of how much rent we’ve lost per property during coronavirus. Also, what does rent arrears mean? How much “reduced” are we talking about on average across all properties?

If this is a 6-month freeze both in rent and mortgage payments then the PP market sell-off is not justified. The market is overreacting. But if tenants don’t pay the rent at all later on, then things are getting worse.

Rent payments aside, what about the damage to property prices due to COVID? Guardian/Nationwide wrote on June 2nd: “The annual growth rate slowed to 1.8%, down from 3.7% in April and the slowest since December.”.

You’ll need to read behind the title: “UK house prices fall at fastest rate since 2009 amid coronavirus crisis”. Only to find out what they mean is: “Property prices are rising slower than before.”. Is this because of all the gov support and the money printing? I don’t know. But if it’s true, it’s definitely better than I expected. Maybe we haven’t seen the full impact yet.

This is why investing is hard

You have to always weigh risk vs reward. I can imagine people in 2022 saying one thing or the other:

1. Things looking good:
   Of course, Property is back up now that we’ve got the vaccine. Did you really have to sell at a loss? You’re not meant to be a property investor.
2. Things not looking good:
   You should have sold when it was only 10% down. What were you waiting for?

Right now, investor’s psychology is at an all-time low. Unemployment at an all-time high, rent arrears left and right, people not spending much fearing they will contract the virus, etc. When things are rosy, people are overexcited and happily pay a 25% premium for owning fancy fortress properties.

This is also another challenge when investing in property crowdfunding vs traditional Buy to Let. In good times, you have the option of selling at a click and cash in your chips. But unlike BTL, in bad times, you can actually see the loss right in front of your eyes.

You can’t easily find out your BTL value. Unless you sell. And nearby comparables can only tell you so much. It’s also a hassle to do the research. So you presume that the property present value probably hasn’t changed much. Or you make stories in your head that it has even increased. Since this is a long-term investment, you’ll sell it when it’s time.

But being able to sell and buy at a click comes with behavioural costs!

My portfolio and what I am doing

Some of my holdings are purpose-built university accommodation (PBSA). 30% of my portfolio to be exact. I believe these are in worse condition because if there’s no campus, there’s no student and no rent.

But at the same time, I’m not willing to sell at a 20-25% loss! I think if these traded at a 10% loss I would be selling. I’ll keep an eye on these ones. There’s just too much uncertainty around the new operational model for universities.

Someone is willing to buy from me at this price and I don’t think it’s worth giving them an opportunity for a ~10% yield down the line.

Because I am investing through my limited company, university accommodation has an added tax benefit. Rent is paid out as dividends and is tax-free. This is how taxes work in Property Partner. PBSAs represent about 30% of my property portfolio. Pre-COVID I was comfortable with this allocation, now I’m not.

My non-uni properties are performing much better. One of my favourites, The Warehouse in Chester, is down just 8% from its latest valuation of late March.

Does the secondary market expect property prices to drop 8% in the next valuation round?

My favourite type of properties are in the Northwest where prices are not crazy high (yet) , yields are >= 4.0% and where there is room for price growth. Solid properties with good fundamentals. I’m not selling those.

My development loan in Epsom, Surrey yielding 9.5% is probably not going to be ready by November 2020.

As I’ve previously mentioned, property makes up ~12% of my portfolio. I’ve always liked property and would like to get more exposure, up to 1/3rd of my net worth. But too much GBP exposure during coronavirus doesn’t make for a good night’s sleep. So I’m not adding any more money just yet.

On other news

The 5-year exit plan of properties is on hold. They’ve started a new capital discount investment plan where you purchase properties that are selling at a -15% discount or more. If properties bounce back after coronavirus there’s money to be made. But will they?

We should expect to hear next from Property Partner on the 31st of July. Until then, keep calm and carry on ;)

I’m interested to hear from you.

Those of you who run your Buy-to-Lets, have you frozen or reduced the rent? And those of who are renting, have you asked for a reduction from your landlord?

Related articles:

• Coronavirus Special: Investing during a pandemic
• The Property Partner Experiment – Q4 2018
• Property Partner Returns: How much can you really make?

Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!

This is part of my Property Partner investment series. You can find all the previous articles here.

Property Partner investing 3 years later

Property Partner Investing during Coronavirus

Property Partner Returns: How much can you really make?

Property Partner Fee Structure: Is it worth it now?

Interview with Property Partner – Robert Weaver

How Taxes Work at Property Partner

The ability to buy/sell properties to other investors in the secondary market makes it an incredible tool. It was for me what businesses call the unique selling point. But making money is the primary goal of my investments so here are some facts about Property Partner so far.

Property Partner Returns

What returns can you expect with Property Partner? Well, the historical return since the platform started is now 6%. Rental income accounts for 4.7% and 1.3% comes from property appreciation (capital gains).

Although up to 2018, Property Partner returns were at 7.3%, the stagnation in property prices has brought the returns down to 6%.

That’s not surprising given property prices have stopped growing like crazy after the referendum. Time for the North to shine and London and the South to mean revert to lower levels. Looks like my thinking was right to avoid London and focus on the “Northern Powerhouse”. That’s Newcastle, Manchester, Sheffield and Liverpool in 2018, and still is.

As of end of 2019, the average return since Property Partner launched (2015) is 6% per year if properties are sold as whole units. However, if we follow the intended method of sale, which is to sell units one by one, then Property Partner has achieved a 9.6% total return since launch.

That’s a big if, but Property Partner has already managed to sell 4 properties so far. They wanted to prove that the selling method works. They even sold them higher than the RICS valuation. PP has a big advantage buying in bulk compared to me investing on my own. I wouldn’t be able to afford a mortgage on this huge castle shown below! But PP managed to buy it and sell a single unit recently for a 95% capital gain on investor’s equity.

I don’t expect such a huge gain in future units sold, but I expect some extra “break up” value. All property units go through a RICS valuation every 6 months. But it’s still a bit early to say whether the RICS valuations are right. That’s because most properties are only now slowly approaching their 5-year exit point.

However, I think an independent RICS valuation is the closest thing we have to accurate property pricing. In most cases, they know what they’re doing better than I do so I’ll take that.

A rock-solid Property Partner portfolio

Investing in the North proved to be the right thing to do so far! It’s also probably the reason that this year I’ve outperformed the Property Partner all-property portfolio by ~3%.

PP has returned 3.5% during Oct 18 – Oct 19 across all properties. My personal returns are 5.67% after fees so around 6.5-7% before fees in the last 12 months.

The selected one in Newcastle is a Purpose-built Student Accommodation (PBSA) which is a trendy term lately. It was one of the first investments I made for a 7% annual dividend (rent). I was happy to take such a good yearly rent in our low-yield environment. I was also thinking I’m providing a nest to a foreign student studying for exams partying in his 20s.

I’ve previously mentioned it makes sense for me to invest for income rather than growth. That’s because I invest as a limited company where dividends (rent) are tax-free. As an individual, the first £2,000 of dividends per tax year are also tax-free. Then you’re taxed depending on your income level. More about property partner taxes on this link.

But income should not be the only criterion. In fact, the biggest gains in property come from the property prices going up in value, not rent. Partly, that’s because properties are leveraged with a mortgage. In PP, mortgages usually come at 50% LTV. So at a 50% loan-to-value (LTV), a 5% gain is really 10%. Even higher if the loan is bigger.

But it’s a double-edged sword in the short term… Just look at this Surrey Quays property that has fallen by -35% since PP bought it in 2016! You can now buy shares for 40p each but PP bought it for 59.36p per share in 2016! Another reason why diversification is super important when investing in property.

PP makes it much easier for me to diversify without having a £1m to invest in multiple buy-to-lets.

Some properties may have a bad run but the more properties you invest the smoother the ride. Personally, I think 15-20 properties are more than enough to get a good risk/return profile. I built my portfolio slowly and I kept buying existing holdings on the resale market. Here are some properties I’ve invested in.

My Newcastle property paid its rent to the last penny. But the uni building lost some property value according to the latest valuation. Hence the 2.89% total return.

Then this Manchester property makes more than 10% of my portfolio and has done well. Despite the drop in rent, it has increased by more than 10% since 2016. It trades at a hefty -16% discount right now. My other Manchester property (Agecroft apartments) has not increased at all since its 2017 levels which is why I bought recently.

Although I’m investing for income, I like to keep an open mind. If I see an opportunity for a 10% capital growth return in a year then I’ll snap it up without second thoughts. Tax on profits is better than tax loss harvesting ;) I’ll shortly explain how I go about selecting properties on Property Partner.

I believe lots of properties are trading at more than -10% discount due to the recent fee hike. After fees went up I had to make a decision. I either invest more money to drop the total fees or I pull out at discounted levels. I chose the first route.

Given the discounts in properties right now and the fact I still trust the people I’ve met behind Property Partner, I see this is as a good opportunity to buy more. This also drops my fees further now that I have a >£20,000 portfolio.

How I select properties on Property Partner

Selecting properties myself is harder than investing in passive mode. Property Partner offers 3 investment plans for investing in property. You just pick your investment style (Growth, Income or Balanced) and they do the rest.

I think this is a great way for investors to allocate money in multiple properties. However, not everyone likes to do that. Personally, I like to pick properties myself and be more in control. This comes at the risk of underperforming the Property Partner market.

So far, I’m beating the “index” maybe that’s just due to pure luck! Anyway, here’s how I select properties on Property Partner on the resale market.

1. Decide on investment style

First, I decide on investment style. Income means buying properties that pay good rent. I define good rent as 5% dividends or higher. Some examples are the Stalybridge property and university PBSA units such as this one and this one.

Growth means that properties have a good chance of appreciating in value. I don’t expect PBSA’s price to outperform a flat in Liverpool, therefore, I’m getting higher rent now at the cost of future returns.

Obviously, if you can get both that’ll be a nice advantage which is why sometimes I will invest in properties trading at a big discount while offering at least a 3% rent. Right now, there are plenty of these.

2. Sort by cheapest properties first

This is value investing applied to property. Property Partner offers a nice feature where you can list all properties in Data View. From the menu, click on Properties -> Data View -> Premium on Latest Valuation

If you click on Premium on Latest Valuation you can sort by highest or lowest premium which is awesome. I will usually select the All properties-by-page button at the bottom to get an entire view of the PP portfolio. It’ll look something like this.

3. Focus on properties matching your criteria

Starting from the top, I try to match as many of my criteria as possible. My criteria are as follows:

• Discount compared to the latest valuation.
• Not London or Southeast (for now)
• Higher than 3% rental yield
• Nothing obviously wrong with the property (like rent suspended due to fire investigation, etc)

A rent reduction is usually not a worry. Similar to how an aeroplane crash should actually make the airline’s next journey much safer because all eyes are on this! Usually, a drop in rent is followed by investors overreacting and panic selling. This makes up for the lost rent and then some.

If I want to make a big purchase, say £5,000 on a single property and I’m not sure, then I will also have a look at the RICS notes. When RICS make an estimate, they leave notes explaining each property valuation. You can download the RICS notes from Property Partner’s revaluation blog post. They mention “comparable information provided by Allsop” with a link.

I love the transparency on this one.

Sometimes finding the area to invest in is only half the battle. For example, I have two properties in Manchester, one is up 5% and another one stayed at last year’s levels. If I look at the RICS notes for my property I see this:

How awesome is that for finding answers in niche streets.

I think it’d be easier if PP could expose these notes per property, rather than having to download a document and search but I’m not that bothered.

Last but not least, the 5-year exit mechanic is something to look out for. It’s still early to say and there are simply not enough properties that have gone through the selling process. But I believe I will find good discounts to buy properties just a month or two before the exit. This way if PP can sell at the RICS levels then I will make a nice arbitrage. Stay tuned on this one.

4. Bid or Buy

Once I’ve selected a few properties I like, then, I will look at the bid/ask spread. If there is a big gap between buyers (green) and sellers (blue) then it’s worth bidding at a price higher than the highest buyer. A big spread means that buyers and sellers don’t really agree with each other while nobody is giving in!

I will keep my bid live for a week or so. Most of the times it will execute depending on liquidity. But sometimes, I will just buy from the lowest seller, especially if the property is trading at a discount and the spread is small.

Tip: Bidding does not reserve your funds. This means you can actually bid on multiple properties with a fixed sum of money and just wait for them to execute!

Latest property funding:

Final Thoughts

The returns have been OK in a tough environment for property. Although the global stock market hits all-time highs every year, I find comfort knowing that my property portfolio does not move in line with my stocks. This is what this bucket is for.

Diversification does not mean that all assets in your portfolio should do well. If this happens consistently then your portfolio is too concentrated. I like alternatives and want to have a more predictable passive income from rent too.

Lately, I’m flirting with the idea of development loans to boost my returns. Dev loans started about a year ago and can go tax-free in an ISA. Property Partner has started issuing more development loans recently, usually once a month. They have now started paying back investors as the old loans are now completing.

My only worry is that the loans are usually “second charge” meaning that the first charge in the case of default goes to the senior lender. However, the fact that the owner of the development company can provide a personal guarantee over the full value of the loan is very positive.

Therefore, I have just invested in my first development loan and will keep an eye on these opportunities. I should probably write a post explaining how development loans work.

How have your returns performed? Or what holds you back from investing?

As a reminder, if you want to support this blog consider signing up to Property Partner using my affiliate link. Helps me and the blog to keep going. Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!