REIT investment with a bridging loan
Bridging loans are typically associated with making a property purchase, but investors and business owners use them for many purposes. One of which is to invest in a REIT (Real Estate Investment Trust).
what is a REIT?
A Real Estate Investment Trust is a property investment company that offers shares that can be traded on stock exchanges. REITs can typically own a wide range of real estate including both commercial and residential properties. To be eligible to trade as a REIT in the UK, the company must perform three functions:
- Generate a minimum of 75% of its profits from rental income.
- Have 75% of its total assets engaged in property rental.
- Pay 90% of total rental income to investors of the company.
- Must have at least 100 shareholders invested within it.
- Have no more than half of the shares owned by 5 or less individuals.
The payoff for operating under these conditions is that a REIT does not need to pay either capital gains or corporation tax on investments made in property.
why choose a REIT over direct property purchase?
Whilst the direct ownership of property can provide investors with a regular income flow via rental, it requires hands-on management. Even hiring somebody to manage the property for you, the owner will always have direct responsibility for the property. Alternatively, investing in a REIT will provide investors regular funding in the form of dividend. As highlighted above, these dividends are required to be at least 90% of the total rental income received.
In addition to this, being invested in a REIT offers wider exposure to a range of property types. Private investors may be deterred from entering the commercial property sector, but a REIT provides them easy access. REITs are also a far more liquid type of investment. Direct ownership of a property provides a limited pool of investors that would be willing to purchase it from you, whereas ownership of a REIT offers liquidity as it is traded just like stocks and shares.
REITs are also a good way of introducing further investment diversification into your portfolio.
the drawbacks of REITs
As well as being a benefit, there is an obvious drawback of the 90% profit pay-out. Once these dividends have been paid out to investors, there is little to none left to purchase more property and debts can therefore be incurred. In business, debt is an acceptable way to fund investment, but property does can possess elevated risk.
Property values can be susceptible to adverse market conditions, as seen in the past few years with Brexit. Therefore, if a REIT undertakes additional debt to purchase further property but the prices fall, the LTV will rise making it more risky debt.
how to invest in a REIT with a bridging loan
As well as providing fast and flexible loans for direct property purchase, bridging loans can also be provided business owners that seek funding for investment. Once an initial enquiry has been made, investors can find their terms agreed in principal within a matter of hours. Depending on the level of an investment needed, loans between £50,000 and £10,000,000 can be in place in just days.
The loan will normally be secured against a property with interest typically starting from 0.75% and terms last from between 1-24 months depending on your exit strategy. Another beneficial feature is that adverse credit history and CCJs will be considered and no personal guarantees are required.
If you would like further information on bridging loans to support an investment, call us on 0203 051 2331 or use this contact form to get a direct call back.