What are the alternatives to buy-to-let?

Buy-to-let has long been a popular investment. Rental payments provide a regular income stream while rising property prices can offer investors impressive capital growth. 

However, for some years, it’s not been plain sailing for landlords. Rising interest rates have increased the cost of borrowing, while changing legislation, including the Renters’ Rights Bill, is giving landlords increasing responsibilities to their tenants. 

Tax changes have hit landlords in the pocket as well. Since 2016, anyone purchasing a second property has needed to pay additional stamp duty, with the surcharge increasing to 5% above standard rates in October 2024.  

The ability for landlords to deduct mortgage expenses from their rental income to lower their tax bill was also removed from 2020. Now landlords can only claim a 20% tax credit – increasing the tax burden for landlords that pay higher rate income tax. 

As a result, buy-to-let is losing its shine; according to government data, 31% of landlords are now planning to sell property during the next two years and only 7% plan to invest further. 

So, if you like the sound of investing in property, but are put off buy-to-let, what are the alternatives? 

Property crowdfunding 

One buy-to-let alternative is property crowdfunding. This involves multiple investors coming together and pooling their resources to offer finance to property developers, for an equity stake. 

Some arrangements work on a buy-to-let model, where a property is purchased for the long term and the rental income is shared between investors. Capital gains would only be realised when the property is eventually sold. 

Or, it’s possible to help finance development projects. This is a shorter-term investment (typically two years) where all the profits are taken once the project has been completed and sold. 

The profits are potentially greater using this model, but it’s also the riskier option of the two. 

Property peer-to-peer lending  

An alternative to property crowdfunding is peer-to-peer (P2P) lending. This involves offering loans to property developers. However, rather than getting an equity stake, the loan is secured against the property and investors earn interest on the loan. 

Interest rates can be between 8% and 10%, depending on the loan terms and the risk associated with the borrower. 

If you decide to go down the P2P route, another plus is you can invest through an innovative finance individual savings account (ISA) to shelter your returns from tax. Each year you can invest up to £20,000 in ISAs. 

Commercial property funds 

It’s also possible to invest in commercial property, including retail, office and industrial spaces, using collective investment vehicles such as mutual funds or real estate investment trusts (REITs). 

And, unlike buying property yourself, these options allow you to shelter your returns from tax, either by holding investments in a stocks and shares ISA or self-invested personal pension (SIPP). 

Funds will either use investors’ cash to buy property directly, or they will invest indirectly by purchasing shares in property companies. 

Direct (bricks and mortar) 

Funds that buy property directly can be appealing to investors that want a tangible investment. Investors can get access to a diversified property portfolio and enjoy the benefit of regular income and capital growth over time. 

However, they aren’t without downsides. Property funds can be illiquid as property takes time to buy and sell. This can be particularly problematic when performance is poor and lots of investors want to sell up at the same time. 

To manage liquidity challenges, managers will often hold substantial amounts in cash and, in certain cases, may limit trading to protect the portfolio. 

Charges on property funds can also be higher than other investment funds as buying and selling property is expensive. 

A more practical option may be to invest directly in a property portfolio using a REIT or a property investment trust. As these are companies listed on the stock market, investors buy shares rather than units, so managers don’t face the same liquidity challenges. 

However investors need to be aware that the structure of trusts mean they work differently to funds. Shares may trade at a discount or a premium to the value of the trust (its net asset value or NAV). Trusts can also borrow to invest; known as gearing, this can magnify returns when share prices are rising, however it will also magnify losses if they fall. 

Indirect  

An alternative approach is to invest in a vehicle that buys the shares of property companies. This means you get the benefit of investing in property as an asset class without buying it directly. 

Many indirect funds will buy shares in REITs, mentioned above. 

Property shares 

If you are seeing lots of new housing estates crop up where you live, you might be tempted to consider buying shares in the major housebuilders, such as Taylor Wimpey or Barrett Developments. 

However, buying shares in individual companies can be risky as you are pinning your investment on the performance of one business. It’s lower risk to invest in funds that will invest in a diversified portfolio of shares. 

Get expert financial advice 

Property is a tangible investment that’s easy to understand. And, if you already have money invested in the stock market, it can be a great way to add diversity to your portfolio. 

However, whether you’re considering buying a rental property or investing in buy-to-let alternatives, it’s a good idea to get qualified professional advice first. 

Investing in any type of property carries risk. 

A qualified financial adviser or mortgage adviser will help you consider your investment within the wider context of your overall investment portfolio, taking into account your financial goals, personal circumstances and your attitude to risk. 

They will also ensure your investment is tax-efficient and help you avoid surprise bills.