Gargantuan investment costs

You can buy a residential property with your own cash or by committing to a buy-to-let mortgage with a cash deposit. But there are risks, TMAS asserts, “if you need to sell the property for a loss, the sale price might not cover all that you owe on the mortgage.” In that scenario, you’d need to find more cash to pay off the mortgage, so your investment would be working backwards – instead of making you money, it would be losing money.

The site says there will be extra costs and you’ll need to put time into running the property and all of that could eat into your returns. When you become a landlord, “you’re effectively running a small business – one with important legal responsibilities.”  

TMAS isn’t making buy-to-let sound attractive, is it? Yet there’s more. “Also remember, that if your tenants leave and there is no rent coming in, you still need to make your mortgage repayments.” Indeed, I agree with TMAS when it says “buying to let is a big commitment.” It is also unattractive, in my view, because the tax regime is working against the idea and property prices look dangerously high when you compare them to the average wage, which means property is less affordable than it was once and prices could face downwards pressure at some point.

Why this looks like a better way with property

TMAS says property investment can “feel more tangible,” but I think that’s an illusion. The reality is that you are stuck with a buy-to-let property because the cost and inconvenience of selling up, and the necessity of finding a buyer means a property investment is very illiquid. So why get yourself into something that’s hard to get out of when you can buy shares in a property company such as TR Property Investment Trust (LSE: TRY)?

The Trust is long in the tooth when it comes to investing in property and has been around since 1905 with the shares available on the stock market since 1982. It invests in the shares of property companies “of all sizes on an international basis” and also invests in investment property located in the UK, which means you can get a lot of diversity in the underlying investments by buying the shares of the trust. The directors state on the company’s website that the trust aims to identify well-managed companies of all sizes and the directors “generally regard future growth and capital appreciation potential more highly than immediate initial yield or discount to asset value.”

The dividend yield is running close to 3.4% and the firm scores well against quality and valuation indicators. If you are interested in investing in property, I reckon TR property Investment Trust is well worth your further research right now.

However, that’s not to say that prospective new investors should simply avoid the property sector. There are other ways to get invested in property without becoming a landlord yourself. Via property-focused investment trusts and REITs, investors can still earn attractive returns without having to worry about finding a decent tenant or day-to-day management.

With this in mind, here are two property investment vehicles which may be worth a closer look.

Student property

Empiric Student Property (LSE: ESP) is a real estate investment trust which focuses on investing in the purpose-built student accommodation sector. Student property is a good substitute to investing in residential property, because due to the substitutability between student and residential properties, investors in the student property sector maintain a high level of exposure to UK house price movements.

Student property does however offer two key advantages over traditional residential buy-to-lets. First, student property is intrinsically more defensive, given the non-cyclical nature of demand for higher education, which means cycles of boom and bust have little impact on student numbers. As such, student property will likely fare better than most other property sectors in a downturn, in terms of the stability of vacancy rates and rental income.

Rental premium

Second, purpose-built accommodation typically commands a rental premium to similarly-located residential properties, due to the chronic shortage of modern, purpose-built student properties and the general preference of students towards living in such places.

Empiric Student Property has proposed a full-year dividend of 5p per share for 2018, giving prospective investors a forward yield of 5.1%. Dividend cover, which is currently at 60%, is expected to rise to at least 100% in 2019.

Diversification

For investors looking for greater diversification, the TR Property Investment Trust (LSE: TRY) may be a better pick.

Unlike the vast majority of property investment vehicles, TR Property’s portfolio consists of both European-listed real estate investment trusts and direct property. The company’s direct property investments consist of a mix of retail, office and industrial properties — they are all located in the UK and currently represent just 7.4% of its total assets.

Focus on growth

In the REIT space, the company picks out well managed companies of all sizes, focusing primarily on future growth prospects and capital appreciation potential. There is a sizeable exposure to German residential property, with Germany’s largest REIT Vonovia being its single biggest asset (representing 11% of the total). Overall, the UK is still its largest geographical exposure, representing 40.9% of its assets, and this is followed by Germany (29.1%) and France (18.2%).

The fund is a top performer in the property sector — over the past five years, shares in the trust have returned 132%, nearly double the performance of its FTSE EPRA/NAREIT Developed Europe benchmark, which gained only 75%.

At the time of writing, shares in TR Property yield 2.9%.

It’s what you do with this money that can really make a difference to your retirement fortunes. Saving is just part of the puzzle. You’ve worked hard to earn your money, so your money should be working hard for you.

Save, then invest

The best way to get your money working is to invest. For example, over the past five decades, the FTSE 250 has generated an average annual return of between 7% and 9%. In comparison, today the highest interest rate on offer on cash savings is around 2%.

This performance gap makes a difference when you’re saving for the future. £1,000 invested at 2% will grow into just £2,700 over 50 years. However, if your money is earning 9%, £1,000 will become £88,500 over the same period. In other words, a few percentage points of returns could be the difference between achieving a comfortable retirement and having a nasty shock when it’s time for you to leave the workforce.

With this in mind, I have compiled a list of the five top investment funds that I believe can help you achieve the retirement you want.

There are hundreds of investment funds on the market at the moment, but I have chosen these in particular because I believe they offer the best exposure to vital global investment themes at the lowest cost. As they are mostly equity funds, they are only really suitable for investors with investment horizons of 10 years or more. A short-term bond fund might be more suitable for readers planning to retire in the next few years.

Ready-made portfolio

My first top fund pick is the LifeStrategy 60% Equity Fund. The last time I wrote about this at the beginning of March, I claimed that it was one of the best funds around for investors of all experiences due to its international exposure and ready-made portfolio. I continue to believe this is the case today.

Split 60/40 between equities and bonds, the LifeStrategy fund gives buyers a well-diversified portfolio at the click of a button and with charges amounting to only 0.22% per year, it is significantly cheaper to use this instrument rather than try to build a similar portfolio yourself. The fund invests in markets around the world through other tracker funds, so there’s no risk that the managers will make a bad stock pick.

As the global economy continues to expand, LifeStrategy should produce sturdy returns for investors for many decades to come.

Tech focus 

LifeStrategy should continue to do well as long as the global economy continues to grow. The one downside of the fund is that it lacks a specific focus. The Scottish Mortgage Investment Trust (LSE: SMT) on the other hand, has a heavy tech focus.

Managed by James Anderson since 2000, Scottish Mortgage’s portfolio is dominated by some of the market’s biggest and highest-profile tech stocks including Amazon.com as well as Chinese internet giants Tencent Holdings and Alibaba.

These companies have transformed the world over the past decade, and it is highly likely that they will continue to do so for many years to come. Technology is changing the world in ways few thought possible. It’s making investors extremely wealthy along the way. I believe anyone investing for the future should have some exposure to tech stocks, but in this rapidly changing sector, paying an experienced manager like Anderson to look after your money is probably the best solution.

Growing population 

One of the sectors reaping the benefits from technological advances is the healthcare sector. Medical technology is improving at a faster rate than ever before, helping tens of millions of people around the world. As the world grows, the demand for medical services is only going to expand, and this is why I believe the Worldwide Healthcare Trust (LSE: WWH) is worth adding to your retirement portfolio.

This £1.4bn trust has been managed by Sven H. Borho since 1995, an experienced healthcare investor, who’s investment skill has produced strong returns for investors. Worldwide Healthcare does what it says on the tin. The trust is invested around the world in healthcare stocks. From drugs sector giants such as Merck & Co to medical device manufacturers such as Boston Scientific and niche pharmaceutical companies like Edwards Lifesciences, this trust is a one-stop shop for healthcare investing.

The one downside is that it is a bit on the expensive side with an annual charge of 0.9%. That said, Worldwide’s total return of 148% over the past five years, compared to the biotechnology & healthcare benchmark return of 131%, shows it may be worth paying that little bit extra to access the team’s healthcare experience.

Bricks and mortar 

Property is one of the most stable long-term investments. The TR Property (LSE: TRY) fund is a great way to add exposure to this asset class to your retirement portfolio.

TR Property invests in both listed real estate investment trusts and physical property. What’s more, it isn’t just limited to the UK. Only 43% of assets are invested in UK property. The remainder is invested throughout Europe (including borrowings, total exposure is 113.2%). The largest holding, accounting for around 10% of assets is Vonovia SE, Germany’s leading nationwide residential real estate company managing 355,000 residential properties around the country.

With an annual management charge of 0.8%, TR Property will give you instant exposure to a global real estate portfolio. The dividend yield is 2.9%.

Global champions 

Bankers Investment Trust (LSE: BNKR) is my fifth and final pick. I’ve picked Bankers because it has a record of creating value for investors, with a low fee (0.45%) by investing in some of the world’s largest and most innovative companies. Also, unlike most of the other funds profiled, it supports a modest dividend yield of 2.1%.

Today, the top five holdings are BP, Apple, Microsoft, American Express and British American Tobacco, a broad selection of top performing companies from around the world. There are 191 holdings in the portfolio overall.

Over the past decade, this £1.1bn fund has produced a total return for investors of 180%, smashing its benchmark return (FTSE All-Share) of 94.5% over the same period. As the trust has already been in business since 1888, I’m almost certain this would make a great addition to any long-term investment portfolio.