In this article you’ll learn:

• What a property fund is
• The pros and cons of investing in funds
• Who property funds are right for
• What to consider before investing in a fund

What is a property fund?

A property fund allows you to buy a share in property portfolio which someone else manages for you.

A simple way to think of it is as a box filled with objects. The fund is the box, and the objects are the properties. If you buy a 1% share in the box, you get a 1% share of all the objects (properties) in it.

Because the properties are rented out, you’ll get a 1% share of all rental profits. And as the value of the properties rises or falls, the value of your share changes accordingly.

It doesn’t matter when you buy your share: you get exposure to all the property that’s already in the fund and anything else the fund decides to buy in the future.

The pros and cons of investing in property funds

Let’s look at the pros first:

• Hands-off: Investing in property funds is the most hands-off property strategy there is. You don’t have to arrange mortgages, you don’t have to deal with solicitors, you don’t even have to deal with management. It’s all taken care of for you by the fund manager.
• Diversification: You get exposure to a portfolio of hundreds, if not thousands, of properties, not just the handful you’d be able to buy on your own. Plus, since it has more buying power, a fund can make investments that you could never make on your own (like entire apartment blocks, or shopping centres).
• Less cash needed: The entry point to invest in funds is a lot lower. It may be as low as £100, whereas for a buy-to-let you’d need at least £30,000 to get started.
• Liquidity: It’s generally easier to sell your share and get your cash back out of a fund than out of a property, but because the underlying asset (property) is illiquid, it’s not necessarily instant or guaranteed.
• Tax benefits: You can hold some property funds in an ISA or pension, meaning you don’t pay tax on profits within your annual allowance.

And now for the cons:

• Lack of control: If you like to be hands-on and dedicate your time to running a portfolio, then investing in a fund isn’t going match your needs.
• Extra costs: Running a fund comes at a cost, so there’s an extra layer of expenses on top of the property-related expenses, which will be deducted before the profits are paid out.
• Visibility and liquidity: The visibility of share prices you get with a fund can, for some people, be a drawback. It can be stressful watching the value of your investment go up and down and you might be tempted panic-sell your shares at a point when it’s not attractive to do, which – as mentioned above – can be easier to do than selling a property.
• A bit boring: Investing in a property fund can be quite dull. If all your fund gives you is a fact sheet every quarter, which is what most of them do, then you don’t feel much like a property investor. You just don’t get that emotional experience or feel connected to the properties that you own.

Who are property funds right for?

You’ve probably already got a good idea from the lists above as to whether property funds are right for you, but let’s dig into some more detail about who they are most suited to:

Time poor investor: If you’re somebody who’s busy working long hours or just has other things that you want to do, then having somebody else make investments for you could well be attractive.

New investor: If you’re new to property and want to get some experience in the sector before making a big commitment, then investing in a fund could give you the exposure to the market you need to build your understanding.

Cash poor investor: If you’re struggling to save up to buy your own property or get a mortgage at an attractive rate, investing in a fund could be a way of getting into property earlier.

Risk averse investor: If the thought of pouring all your money into one property fills you with fear, investing via a fund offers a way to spread the risk through diversification.

Passive investor: If you’re not really that into property but want some kind of allocation to bricks and mortar, investing in a fund lets you do this without the hassle of building your own property portfolio.

What to consider before investing in a fund

It’s important to do your research before parting with your hard-earned cash.

Consider these three Ws:

What: There are funds that invest in just about every type of property you can imagine. Decide what sub-set of property you want exposure to. Is it family homes, student accommodation, office blocks or something entirely different? Once you’ve made up your mind, you can then go looking for funds that invest in that type of property.

Where: Different areas perform well at different times, and some areas tend to perform better than others. You’ll want to know what locations a fund is investing in and establish how well these locations are likely to perform in terms of rental profits and capital growth.

Who: Look at the fund manager’s performance and credentials. You won’t be making the decisions, so you need to trust the people that will be making them. Are they people that you believe in?

Investing in a property fund has its pros and cons, just like any other strategy. It’s not a failsafe way to make a passive income.

Whether it’s right for you depends on your individual circumstances: what your goals are, your priorities, how much time and money you’re willing to put in etc.

If investing in a property fund is something you’re interested in, then you might want find out more about the fund we’ve launched at portfolio.co.uk