How to Invest in Real Estate with Little Money
At the time of writing, the average price of a house in the UK according to UK House Price Index is just over £225,000.
Even if you can get an 80% loan to value mortgage you still need to find £45,000 for your deposit, not to mention solicitor fees, agent fees, broker fees, and stamp duty which are likely to total well over £10,000.
You aren’t going to have much change left from £60,000, but what if you don’t have that kind of money?
Even if you do have that kind of money, there are other reasons why you might not want to buy a property. Maybe you don’t want all the trouble that goes with buying and selling or letting out a property.
Maybe you are not comfortable taking on large levels of debt through a mortgage or maybe you are not comfortable putting all your eggs in one basket, or maybe as an expat you simply can’t get a mortgage.
Fund fun fun
Whatever the reason, there is another way. You can simply buy real estate funds that trade on the stock market.
Usually called Real Estate Investment Trusts (REITs), these are real estate companies that hold all kinds of rent producing property, such as warehouses, offices, shopping centres, apartments, hospitals and hotels.
Perhaps the most straight forward way of investing in REITs is to buy Exchange Traded Funds (ETFs) that contain a basket of REITs.
As well as requiring not much in terms of outlay, there are many other reasons to invest in REITS. Here are 6 other reasons to add REITs to your portfolio.
The advantages of REITs
1. They pay a minimum of 90% percent of their taxable income in the form of shareholder dividends each year, so the dividend is historically higher than what you get with stocks.
2. You can buy an ETF that contains a basket of different companies with all kinds of properties located all over the world, thus helping to reduce risk by spreading your bets through diversification.
If you’ve got a couple of apartments in London and the UK housing market tanks, you may loose a lot of money.
On the other hand if you invest in a global property fund, you’ll have little pieces of different kinds of properties all over the world, so it wouldn’t really matter what happened in one kind of property in one city, in one country.
3. REITs have some special qualities that make them an alternative asset class to the more common bonds and stocks. Though sometimes they go up and down with stocks, at other times they don’t and because of this they can add asset diversification and lower your portfolio’s volatility.
4. Whereas property transactions can often take months to complete, you can buy or sell a REIT in minutes.
5. You invest as much or as little as you like. You can buy shares in big UK REITs like British Land or Land Securities for less than a tenner and there are property ETFs containing a basket of REITs with share prices less than £25.
6. REITs have a professional management team that know exactly what they are doing.
The bottom line
If you agree that allocating a portion of your portfolio to real estate might be a good idea, the only question that remains is how much of your portfolio should be invested in real estate funds?
Studies have shown that somewhere between 5 and 15% is optimal. Usually, REITs take up some of your stock allocation, so a traditional 60/40 split between stocks and bonds could be split 45/15/40 between stocks, REITs and bonds.
So investing in real estate without a lot of money isn’t complicated. You can do it by allocating 10-15% of your investment portfolio to REITs.
