Property Funds
How it works
Property funds
There are several ways of investing in property without buying the property directly yourself.
One of those ways is investing via property funds.
A property fund is a collective investment which is usually listed on a stock exchange. In the UK, this is based in London. An investor would buy units or shares in the fund. The fund will then pay the investor an income from the fund. This is called a dividend. Like property, a property fund can go up and down in value as it is subject to market forces.
Generally speaking, funds offer several advantages compared to buying the property direct. One of the main ones is a lower entry level. This means that you can participate in property with a modest amount of savings.
Furthermore, as you are investing via a fund, you do not need to worry about securing a mortgage to buy the property. Nor do you need to worry about periods when you don’t have a tenant. Other benefits include not having to pay stamp duty.
With funds, you can also invest in sectors of property that might normally be outside of reach for the average investor. Many funds, for instance, specialise in commercial property where the cost of entry can be very expensive, and it requires a far higher degree of due diligence to complete any purchase. Many types of commercial offer higher yields compared to residential properties.
Perhaps, though, the greatest benefit is liquidity. As a fund is trading on a stock exchange, you can liquidate your investment quickly. There is no need to instruct a solicitor to help negotiate the sale. This means there are fewer transaction costs compared to buying property direct.
We should point out that funds are not all good. You are entrusting the performance to a fund manager, and he or she might not perform well. Another limitation is that you can’t always ride the storms, as you are in the fund with other investors. If they decide to sell, the fund may be forced to liquidate a property as a distressed sale. This will ultimately affect your performance.