Rob Dix, co-founder of Property Hub, and author of "The Complete Guide To Property Investment" looks at the pros and cons of owning property versus lending against property.
So far today, I've had a quote for replacement windows that must've mistaken my 2-bed terrace for The Shard. I've had a testy phone call from a surveyor and wasted half an hour filling in paperwork for my mortgage broker. And it's only just gone 2pm.
All this because I own a pretty modest property portfolio.
I also have money with companies who lend against property – including BondMason – who regularly drop nice chunks of income into my bank account, without ever requiring me to book in a plumber for any of the properties they lend against. I've researched this type of lending extensively, and believe it offers strong risk-adjusted returns as long as you choose your platforms wisely.
So - am I daft for putting myself through all the hassle of owning property directly? Should I just sell the lot and bung it into property-backed loans?
How to invest in property without buying a house: the benefits of property-backed lending
You're already on BondMason's website, so you may already be familiar with the benefits of property-backed lending.
In the case of BondMason, you make a target net return of 6% per year without having to lift a finger. You have the confidence that the loans are backed by an asset with a clear and established value. You also know that for those loans that don't go as planned, there's a robust watchlist system that so far has meant the majority of funds are recovered.
And the big one: under normal market conditions you have good liquidity, meaning you can exchange your loans for cash whenever you want to.
All of this without ever having to come face-to-face with an estate agent.
This is a fantastic option, which barely existed a decade ago. So - should everyone just sell their properties, buy into property loans and save themselves a lot of effort?
Who should invest in property directly?
There are many strategies for investing in property, all with different advantages and drawbacks. But for the sake of a simple comparison, I believe there are two situations in which direct property ownership is impossible to beat:
1. Buying using leverage, and holding for the long-term
Readily available and inexpensive leverage (in the form of a mortgage) is probably the single biggest advantage of investing in property.
Leverage actually rescues what can otherwise be pretty puny rental returns. If you have £200,000 to invest and you buy a £200,000 property, you might only make a 2% annual return after factoring in all costs. Not really worth it. But if instead you borrowed 75% of the purchase price and bought a portfolio worth £800,000 (ignoring taxes and costs for simplicity), you've effectively multiplied your return by four.
Actually, you haven't, because you have to pay the cost of borrowing that money. Let's say after that, the return you're making on your own money settles at 6% – still three times better than what you'd get without leverage.
That's all well and good – but as we've already seen, you can make a return of 6% by just lending against property instead.
However: leverage also boosts the returns you make from the property itself increasing in value over time.
When you strip everything else away, properties are priced as a multiple of the rent they produce. Rents in turn are driven by wages, and wages tend to rise with inflation. So, although there will be all manner of booms and busts along the way, over the long term you don't have to be a crazy optimist to believe that property prices will rise in line with inflation.
Inflation of 3% over a year will take a £200,000 property to £206,000. But if you only have £50,000 of your own money in that property, that £6,000 represents a 12% increase in your investment!
Extend the time horizon to 20 or 30 years, and you're looking at some pretty spectacular returns – all courtesy of leverage and inflation working together to quietly grow your wealth.
2. Buying bargains, or adding value
Unlike shares, where the quoted price is the price and there's no debating it, there are situations where you can buy a property for less than it would be worth if circumstances were different.
For example, say there are two houses next door to each other – both identical. The owner of one property is in no particular rush to sell, but the other needs to be have the money in the bank within the month to pay off some debts. If you're in a position to move quickly you could easily imagine getting a 15% discount from the hurried vendor, even though the product is identical.
There are also situations where you can increase the value of the asset: if you can spend £20,000 on a refurb that adds £60,000 to the property's market value, that's a great return on your investment.
Opportunities to buy at a discount and add value are unique to property among mainstream investments – and if you're in a position to execute them successfully, they can blow returns from other assets out of the water.
Who shouldn't invest in property directly?
Just because property ownership can produce fantastic returns doesn't mean it's for everyone.
In fact, the people who've invested in property in their droves over the last 20 years – the "dinner party landlords" – are the exact people who probably shouldn't.
The main reason is that investing in property properly requires an immense amount of learning and research. It can easily take tens of hours to educate yourself enough to even tell a good investment from a bad one when you see it. Then it might take researching and viewing 10 or 20 properties before you find one you can buy at the price you want.
And that's just the acquisition stage. When it comes to management, there are hundreds of different regulations to comply with, and an art to finding the right tenants and managing the relationship. Even if you're paying someone else to do it for you, you still need to know enough to assess whether they're doing it properly.
Is all this learning and research worth it? If you're planning to build a portfolio, certainly. But if you're only ever going to buy a single property, it's hard to justify. Which means small-scale investors are making a poor return on their time – or, more likely, shortcutting the process and likely to get themselves into trouble.
You then need to remember that property is highly illiquid. It wouldn't be exceptional for it to take nine months or longer from marketing a property to getting the cash in the bank, so it's not appropriate for anyone who might need their cash back quickly.
The death of the dinner-party landlord?
For many years, people were blinded to these drawbacks by the non-stop headlines of the incredible growth in property prices.
Now, at least until the next boom, the lustre has come off. Economic nervousness combined with the highly landlord-unfriendly tax changes that are being phased in are causing lots of small-scale investors to cash in their gains.
Does that mean that property investing is dead? No, but I see a shift happening.
Different ways to invest in property
Property investment isn't anywhere close to becoming the preserve of big corporations rather than individuals, but I do believe it will start to be dominated by more serious investors. The most recent figures show that nearly half of landlords own just one property, and only 15% own five or more. I see that balance shifting significantly over the next decade.
Those smaller investors who are getting edged out, could do very well from looking at alternative ways to invest in property, including property-backed lending. They clearly understand property and feel safe with it, so property-backed lending is likely to feel more comfortable than investing in the stock market. Another option is property crowdfunding, which keeps the possibility of capital gains open while increasing diversification.
Even more serious property investors might benefit from some exposure to lending. It's a place to store wealth and make a decent return, without having to wait months to liquidate (like with property) or risk having to sell at a time when values have just fallen (like with shares).
Despite the frustrating phone calls, unexpected expenses and frequently wanting to throw my printer out of the window, I'm not about to give up on my property portfolio. Thanks to leverage and the ability to buy well and add value, the last decade has treated me very kindly – and I'm confident the next few will as well.
But I'm very glad that property-backed lending can offer me an alternative, and I think more and more people will come to the same conclusion in the coming years.
Want to join me?
I've invested with BondMason since February 2017, and I'm in the process of moving the majority of my non-emergency-fund cash and other peer-to-peer investments over to them.
If a target net return of 6% sounds good to you, then you can get started here:
There's no tie-in though: if you want to withdraw your funds at any time, you can typically get them back within 1-2 days.
Rob Dix is co-founder of Property Hub, and author of Amazon bestseller "The Complete Guide To Property Investment".
Important Information: This web page is intended for discussion purposes. Without limitation, this web page does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. Nothing in this web page shall be construed as advice. Please contact your Financial Adviser for guidance. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, no representation is made as to their accuracy, completeness or correctness. Any opinion expressed, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Rob Dix at the time of preparation. They are subject to change. Past Performance is not a guide to future performance. Residential property values are affected by factors such as interest rates, economic growth, fluctuations in property yields and tenant default.