So you don’t want to be a landlord, but you do want to diversify into property. Brenda Ward looks at options that you might not have heard of – that are cheaper and hassle-free.
You could spend hundreds of thousands of dollars to buy your own commercial or residential property, but perhaps you don’t have that sort of money to spend. And you may want to invest in property, but you don’t want to be a landlord.
There are many other investments in property which have a cheaper entry level and are hands-off.
The share market
You can buy a small part of a building you couldn’t afford to own yourself by buying shares in a Real Estate Investment Trust, known popularly as a REIT.
These are share market-listed companies that own and manage property.
Buying and selling shares is easy on the stock exchange. You won’t get capital gain but you may get dividends paid out, and your shares can rise in value, so you might sell them at a profit.
Of course, like any other shares, your REIT shares could also drop in price, so look closely at the company you’re investing in.
Some Kiwi REITs are AMP Property Trusts, Argosy Property Trust, Goodman Property Trust, Kiwi Income Property Trust, and Stride.
To get a small stake in the growing property industry, you could also buy shares in a construction company.
In New Zealand, Fletchers is the only listed construction company, however on the Australian Stock Exchange (ASX) there are several companies specialising in construction, such as Mirvac, CIMIC, Downer EDI, and Lendlease.
To indirectly benefit from the building boom, you could buy shares in companies such as James Hardie Industries, which makes materials used in construction.
Unlisted property funds
Some unlisted companies also own and manage property funds for investors.
These funds are usually made up of several properties – offices, shops, or factories. Investors buy shares in the funds, which can grow in value, and most pay regular dividends (returns).
These funds give you access to large buildings, with the benefit of a sustainable return, typically higher than you’d expect in the listed property sector.
Property Managers Group Chief Executive Scott McKenzie says these funds are a great way to invest passively in commercial property.
“You’re not having the day-to-day headaches of managing tenants, health and safety regulations, and dealing with the facilities not working.”
Property Managers Group started 25 years ago in Tauranga with the Pacific Property Fund. Since then, it’s added an office fund, a childcare fund that invests in building new childcare facilities, and a private equity fund.
You can invest in one of these funds for as little as NZ$10,000, and returns have been ranging from 7.2 per cent to 10 per cent.
“Quite simply, investors buy shares and enjoy the passive benefits of owning real estate. We liaise with tenants, collect rents, pay the bills, manage the property, and pay distributions to our clients quarterly,” says McKenzie.
These funds have a PIE tax structure, so there may be some tax advantages to investors on high tax rates.
You can sell shares to other investors on the firm’s database, but it can take from 30 to 40 days.
“However, one of the first things we say to investors is that commercial property is, by its very nature, a long-term investment. And it should be part of the overall diversification of an investor’s portfolio, rather than a 100 per cent investment,” says McKenzie.
Property syndication is an affordable way to buy a small piece of a commercial or industrial building.
It’s a proportional ownership model, where a company buys properties and splits them into parcels for resale. Investors buy a proportion of the scheme, say NZ$50,000 worth of it, and receive returns based on their investment.
For example, Silverfin offers a number of investments, many of them already fully subscribed. One that’s still open is the Oxford Victoria Scheme, which includes two A-grade office buildings in central Christchurch. It’s forecast to pay 8 per cent a year before tax, paid out monthly.
Other people’s mortgages
If you don’t want to own a rental property, why not invest in someone else’s mortgage?
The introduction of peer-to-peer lending rules and new technology has made it possible for companies to split mortgages across a number of investors, says Luke Jackson, chief executive of Southern Cross Partners, which is a licensed peer-to-peer lender, offering home loan investments.
The company offers short-term home loans to people who’ve fallen outside the box of what the banks provide. “Borrowers could be in their first year of being self-employed, could have tax arrears, or they’ve bought another house and haven’t yet sold,” he says. “These people will often later refinance back to the bank.”
He says the service is a win for both borrowers and lenders.
“On one side of the coin, you’re helping people achieve a goal, and on the flipside, you’ve got people funding it who are looking for a good return, with the comfort of knowing that they’ve got tangible mortgage security supporting their investment.”
Typically, the less equity a borrower has in the house, the higher the return will be for the investor. Loans vary between 6.25and 8 per cent return.
Southern Cross Partners pays out the funds upfront, then offers them to investors, who can simply go onto the company’s website to pick a mortgage.
“Like any investment, there’s still risk involved but, for our products, people’s investments are secured by a residential mortgage which is held in a nominee trust company, so they’re not investing in our company.”
Minimum investments start at NZ$10,000.
PIE: A portfolio investment entity is a company that invests the contributions of investors. Different tax rules apply to a PIE investment.
REIT: A real estate investment trust. It invests in property and related products.
Diversifying: Diversifying is about having a wide variety of investments, which reduces your risk.
It’s about not having all your eggs in one basket.
First published 21 May, 2018.
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.