Islamic Finance

What is Halal Property Investing?

Introduction to Halal Property Investing

According to the FT, house prices are booming in almost every major economy in the wake of the coronavirus pandemic. The annual price growth across the OECD group of rich nations hit 9.4%, which is the fastest in 30 years. 

In this article, we will look at the things that must be avoided if we are to invest in properties. We will also look at 3 possible ways that can help us get into property investing. And finally, we will look at the zakat treatment of those investments.

What is halal investing to begin with?

According to Investopedia: “an investment property is real estate purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both. The property may be held by an individual investor, a group of investors, or a corporation.”

Therefore, for the Muslim investor, it is going to be the same approach, and ensuring that each of the investing contract is in line with shariah.

This means that:

  1. a) the subject matter must be halal i.e. you don’t want to collect rental income from a casino for example
  2. b) you are not charging interest such as late payment fees
  3. c) you must have a form of ownership of the property

But first, something that is important to remember is that the capital amount which will be used to invest, must be halal. If the capital is haram, then according to many scholars, any profit made from the investment will not be halal either, even if you invest it in a halal manner.

So, if you already have bought a house with haram money and you are already receiving some form of income through its investment, then primarily you need to give away the capital amount you have used. And secondly, in an ideal world you should try to give away the profit that you have made if you can afford to do so.

1)      Bank mortgage

Conventional mortgages are considered haram based on the element of interest present. It would not be permissible to apply for one to finance an investment opportunity. (For more info on interest in Islam, please click here).

Although some contemporary scholars have allowed Muslims living in the West to take a conventional mortgage. Their ruling comes with certain conditions. One of which is that you cannot use this mortgage for investment purposes.

However, in the UK there are halal alternatives such as the sharia-compliant halal buy to let scheme.

2)       Sharia compliant REITS

A REIT is a company that owns and manages property on behalf of shareholders. It can contain commercial and residential properties. REITs provides a way for investors to invest in a property portfolio without having to buy these properties directly.

Sharia compliant REITS are pretty much similar to the conventional ones. However, they must also go through property and tenancy screening. This means that the properties selected in an Islamic REIT will only be based on the compliance of their activities.

And of course, a REIT is  usually managed by a sharia board to ensure that it is compliant.

3)       Crowdfunding

Crowdfunding platforms are online platforms that connect people seeking equity or debt funding with investors. The investor is part of a huge group of people who will finance a project put forward by its owner.

The issue with debt-based crowdfunding is that investors expect the borrowers to repay them the full amount including the interest. This will make it haram from a sharia perspective.

An alternative would be to go for a form of Islamic debt-based crowdfunding. This could be achieved through a certain mode of halal financing such as tawarruq or murahaba agreement.

As for equity-based crowd finance, the Muslim investor must ensure that pretty much the same sort of screening is carried out as the ones mentioned above for REITs. For example, you must ensure that the portfolio excludes properties that are being acquired to facilitate activities such as gambling etc.

For more information on a type of crowdfunding, please click here.

Zakat Treatment

Depending on the structure of the investment you chose, zakat will be calculated based on the intention that you have at the time of making the initial investment.

If the aim of the investment is to generate a rental income: then you will not need to pay zakat on the value of the properties. You will pay zakat only on the money which you have on your zakat anniversary date.

If the aim of the investment is for capital growth then you will have to pay zakat on the market value of your investment on your zakat day. 

For more information on how to calculate zakat on investments,  please click here.

Halal property investing in the UK

If you wish to have more information on how to invest in a halal way including property investing, please click here

Keep Reading

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Is your pension part of your Islamic will?
A Detailed Review of Aghaz Invest
Every British Muslim needs a will. IFG Wills is an affordable quality option entirely online.
Get exclusive tips, resources and courses delivered straight to your inbox from IFG.
  • This field is for validation purposes and should be left unchanged.
Menu