Commercial property investment for beginners
You can’t beat bricks and mortar as an investment. We’ve been hearing those words for generations, and while the housing market has been through plenty of peaks and troughs over the years, even the biggest cynics must agree that property is right up there with precious metals as one of the safer choices for long-term returns.
The idea of property investment immediately makes most people think of buy to let houses, and all the baggage that comes with them such as problem tenants, midnight call outs for boiler repairs and so on. But there is another way. Commercial property investment can bring the gain without the pain if you go about it in the right way.
Direct commercial property funds
With a direct commercial property fund, you are effectively buying a slice of a commercial property portfolio. But the beauty of it is that despite the word “direct” there is no haggling over the price, poring over a mortgage calculator to work out if you can finance it or finding tenants. All that is taken care of by the fund manager – all you have to do is stump up the investment money and collect an annual return based on the rental income. In addition, your holding will almost certainly appreciate over time, so when you decide to sell, you should enjoy a tidy profit too.
The only real downside to a direct investment is the illiquid nature of the commercial property market. It means it can take time to sell your holding, so if there’s any chance you might need to cash it in quickly, this might not be the commercial property investment option for you.
Indirect commercial property funds
With an indirect fund, you are investing in a unit trust or open ended investment company (OEIC). Effectively, you are building in an extra degree of separation by investing in companies that are themselves direct investors in commercial property. It’s a compelling idea, as it’s a way of getting in on the commercial property investment market but without the liquidity concerns, so you can buy and sell at will.
Most indirect commercial property funds are what’s known as Real Estate Investment Trusts (REITs). They have a lower tax exposure than other investment options, as they are exempt from corporation tax and capital gains tax, as long as they are run in accordance with the rules.
The other variety of indirect commercial property fund is a property investment trust. These don’t have the same tax breaks as REITs, but their trump card is that they can use gearing to boost the money flowing into the trust. It makes for better returns when the market is good, but also means you will feel the pain harder when the inevitable slump comes about.
Commercial property investment is a low risk way to generate solid returns over time. However, it is important to discuss potential investments with a professional to identify the type of investment that best fits your specific financial circumstances.