For over a decade now, Real Estate Investment Trusts (REITs) have operated in the UK. REITs give investors a great tax-efficient vehicle to invest in the property market — better, perhaps, than the traditional buy-to-let market.
If you want to get involved in the property market and are weighing your options, here are five reasons why REITs might be a better bet than becoming a landlord through buy-to-let.
Diversity of portfolio
REITs are made up of investments in multiple property assets. This gives you an excellent diversity of portfolio without the trouble of investing in each individual property yourself.
You can also easily invest in multiple sectors by purchasing shares in different REITs, such as one focused on residential and another on retail.
Because there is a large number of property investments bundled together under one REIT, the risk is spread out. So if one particular investment goes south, plenty of others are there to shore up the REIT’s overall performance.
With buy-to-let, you are often tying up your money in one or a handful of properties, creating a greater exposure to potential loss.
In recent years the government has hit the buy-to-let sector with a number of tax rises, such as higher stamp duty, to hinder the politically-unpopular landlord market. These measures have dramatically increased the cost of business for buy-to-let investors, making it a less attractive prospect.
By contrast, REITs have a favourable tax environment. As the firm Property Investment Partners puts it, “As most of a REIT’s taxable income is distributed to shareholders by way of dividends, it is largely exempt from corporation tax, which means that the usual double taxation — corporation tax plus the additional tax on distributed dividends — is eliminated.”
REIT investors need only monitor the property markets their investments are exposed to, as well as the trust’s general performance, which is easy compared to the effort buy-to-let investors must go to.
Landlords need to make sure they have tenants, are complying with housing regulations, can handle problems relating to their tenants, and so on. Then add to that monitoring the health of the local housing market where they’re invested.
The work of a buy-to-let investor is much more involved than that of a REIT investor.
Offloading your REIT investment is the same as selling shares. It’s quick and easy, allowing you to cash in or to cut losses swiftly.
Buy-to-let investors, on the other hand, must go through the legal rigmarole of selling property to offload their investments, which is expensive and long-winded. There’s no quick exit for buy-to-let investors.