A Muslim’s guide to halal real estate investing

Have you ever wondered why everyone seems to be talking about real estate?

You might have grown up seeing it too – from your parents scrimping and saving for their first home, to your grandparents enjoying a comfortable retirement on rental income, real estate has long been synonymous with financial stability. 

And for good reason – it stands as the oldest and one of the most valuable asset classes in the world.

In fact, in 2022, the total value of global real estate surpassed that of all global stocks, shares and bonds combined, and historically, property prices have generally gone up, even during economic slumps. 

However, in today’s market, buying property can feel like a distant dream, especially with housing prices shooting up while wages lag behind. For instance, in the UK, a house usually costs 9 times more than what most people make in a year.

The graph below indicates that although incomes in England and Wales have risen faster than the general increase in prices due to inflation, they have not increased in line with the house prices.

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This gap makes it particularly tough for young Muslims buying their first home. Many avoid buying a house on a conventional mortgage due to the prohibition of interest in Islam, and they continue to rent because they struggle to save up enough to buy a house in full. 

While Islamic mortgages exist, they often come with their own set of challenges: larger deposits, higher rates and complex terms, leading many to question the authenticity of these products.  

But don’t let this discourage you. This guide aims to break down the basics of real estate investing, showing you how modern, Shariah-compliant solutions can make property investing more accessible – even without hundreds of thousands in your bank account.

What is Real Estate investing?

Real Estate investing, quite simply put, is the allocation of funds into property - be it commercial property, residential property, or even undeveloped land with a scope of future development. 

You can aim to earn from real estate in two main ways:

1. Rental Income: This is the income you receive via rent from the tenants. Rental income can provide investors with a relatively regular and stable income stream that can either supplement other income streams or be the main source of income for full-time property investors. However, like any other investment, this isn’t risk-free and can fluctuate based on occupancy and other market conditions.  

2. Capital Appreciation: This is an increase in your property’s value over time. For example, if you buy a house for £300,000 and its value rises to £350,000 in five years, you gain £50,000 in capital appreciation when you sell the property. 

What are the types of Real Estate investments?

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Real estate investing provides different options that fit your goals, level of risk you’re comfortable with and how involved you want to be. Knowing about these options can help you decide where to invest.

We’re touching on some of the most common types of real estate investments below:

Traditional Real Estate Investments

• Residential Real Estate: Includes single-family homes, apartments, townhouses and vacation properties. These properties are usually rented out to individuals or families.
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• Commercial Real Estate: This includes office buildings, retail spaces and malls. These properties are leased to businesses and can potentially offer higher rental yields as compared to residential properties.
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• Industrial Real Estate: This covers factories, warehouses and distribution centres used for manufacturing and logistics.
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• Land: Undeveloped land can be used for farming or future development. While speculative, it can offer huge growth potential if developed wisely.
   
• House flipping: This approach includes holding a property for a short period of time, where investors buy undervalued properties, renovate them and sell them for a profit.

Online Real Estate Investing Options

• Real Estate Investment Trusts (REITs): (pronounced “reets”) These are the funds that own and operate real estate. They allow investors to buy shares in a portfolio of properties, much like investing in stocks. REITs typically offer good dividend yields and can be easily bought and sold on major stock exchanges.
  
  
• Real Estate Mutual Funds: These funds invest in a variety of real estate-related securities, including REITs, real estate company stocks and sometimes direct properties.
  
  
• Real Estate Crowdfunding: This modern method allows everyday investors to collectively invest in properties or real estate projects. It provides a lower entry point and allows investors to earn passive income without the burden of managing the properties.

For Muslims looking for halal options, it’s important to carefully check the structure and underlying assets of REITs, mutual funds and crowdfunding opportunities to ensure they comply with Shariah principles.

Why should you think about investing in Real Estate?

1. Stability & Tangibility: Real estate is more stable than volatile stock markets or unpredictable cryptocurrencies. It also provides a tangible asset that’s always in demand, as people will always need a place to live and work.
   
   
2. Long-term Wealth Building: Property prices generally increase over time. For example, the official data from the Office of National Statistics shows that average house prices in the UK have increased by over 70% in the past decade.
   
   
3. Regular Passive Income: Rental income can give you a regular income stream, leading to some financial security, without having to work too much for it.
   
   
4. Protection from Inflation: Real estate usually keeps up with or does better than inflation, which means it can help maintain the value of your investments even during the periods of economic downturn.
   
   
5. Portfolio diversification: Real estate helps diversify your investments. This means that real estate doesn’t always follow the same market fluctuations and trends as other asset classes like stocks or bonds. By adding real estate to the mix, you can make your overall investment basket steadier. 

What’s the Islamic view on real estate investing?

As a Muslim investor, you must add an extra layer of scrutiny to ensure that all of your investments are in line with Shariah. This brings us up to the key question: Is real estate investing halal?

So, real estate investments can be both permissible and impermissible, depending on what’s involved in the process. As most of us are aware, traditional ways of investing in real estate can often conflict with Islamic principles because of the prevalent use of mortgages in the purchase of properties. When you get a mortgage on a property, you need to pay back interest on the payments, and involvement of any sort of interest (also known as riba) is strictly forbidden in Islam.

Additionally, engaging in speculative, volatile and unpredictable property trading can be considered similar to gambling, which is also not permissible.

However, this doesn’t mean that Muslims can’t invest in real estate. There are halal alternatives available for Muslim investors that follow these basic rules:

1. Riba-free financing: Look for financing structures that don’t involve interest-bearing loans. This could mean paying for properties with all-cash or using Islamic finance structures approved by Islamic scholars.
   
   
2. Transparent and just dealings: Ensure that all transactions are carried out with full transparency and that the terms are fair to all parties involved.
   
   
3. Ethical practices: Make sure that the property isn’t being used for activities prohibited by Islam, such as selling alcohol or gambling establishments.
   
   
4. Risk and reward sharing: Islamic principles discourage the guarantee of fixed returns. Instead, all investments should encourage the sharing of potential profits and losses.

For more information, please refer to our existing blog on the topic. 

How can you invest in halal real estate in today’s day and age?

Given the high costs and complexities of traditional real estate investing, many people are turning to alternatives like real estate crowdfunding. This approach democratises property investment by making it accessible to a wider audience without the need for a huge upfront payment or the hassles of actively managing the property.

Here’s how it works:

Conclusion

Real estate investing offers a stable way to build wealth over time. However, it’s not completely risk-free. We will discuss more about risks in one of our blogs.

Wahed has been a pioneer in making investments more accessible for Muslims. Over the last 7 years, we have continuously offered an array of halal investment options to assist the Ummah in achieving their financial goals without compromising on religious beliefs. Our latest offering is in real estate, a historically favoured asset class, which has also been synonymous with wealth building. 

We remain at the forefront of providing easy access to halal real estate for our community. We ensure that all our properties are bought upfront without any loans or leverage, ensuring your investment with us is always 100% shariah-compliant.

Our team of experts handles everything from property selection to tenant management, freeing you from the usual hassles of property management. 

Become a property investor now! Earn quarterly rental income and build your financial future with as low as £500.

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