A brief look at the benefits and risks of investing in private rental property via some of the new, non-traditional investment platforms currently appearing on the market.
How things were traditionally
Historically, there have been three main ways to invest in property:
- raising sufficient capital to purchase a property;
- investing some capital but making up the rest by borrowing; and
- via holdings in property unit trusts, real estate investment trusts (REITs), pension funds or similar.
The current landscape
Recently, other innovative ways of investing in property and housing schemes have emerged as the financial technology (“fin-tech”) revolution has broadened and popularised numerous methods of investing. In the property market, there are now different platforms that, where from a relatively modest investment (even as little as £10), an investor can take advantage of a steady income stemming from the rent or interest repayments produced by private rented sector properties, and in some cases (but not all) enabling investors to own a share in the capital value of the property. This is clearly an exponentially expanding industry as shown by the flood of advertisements displayed on everything from the London Underground to social media. Here is a summary of two of the most exciting initiatives:
Online platforms have emerged which allow individuals to lend to property-owners or property purchasers. Peer-to-peer lending particularly assists those looking to purchase buy-to-let properties where the aim is to rent the property out, pay-off any outstanding mortgage and, if possible, skim off a regular income. The benefits for the lending individual are that their investment is secured, by way of a mortgage, against the underlying property and that the investor can specify the loan period thereby giving the investor both flexibility and security. The downside is that the investor’s return, which is comprised of interest repayments by the property owner under the terms of the mortgage, is dependent on interest rates and could therefore vary with time.
Examples of peer-to-peer property lending platforms include LendInvest and Landbay. Landbay has recently been acquired by the online giant Zoopla, whose CEO and founder had the following to say: “Property investment has never been available to the masses before in this way and for those looking to get onto the property ladder or saving towards a property purchase, the ability to ensure that their investments keep pace with the property market is essential.”
A number of start-up companies now make it possible to enter the residential property market by allowing a 'crowd' to put money into specifically advertised investments, such as individual residential flats or houses. This allows an investor to have stakes in different properties at varying levels; such as £100 in a residential London apartment and £200 in a student house in Manchester. Your money buys you a share of a company which is the owner of the property in which you have chosen to invest. On the plus side, unlike purchasing property in your sole name, you share all the charges required to purchase and maintain the property with others. You can benefit from a steady income stream from the rent and the company manages the property by finding tenants and carrying out the landlord’s functions. The chief disadvantages of this model are twofold; the initial fees (on signing up) are often high and the fee taken by the platform can equate to as much of 25% of any profits made. This fee covers the costs of advertising, letting and managing the property.
Some examples include: Property Partner (accepts investments of £50 or more and promises rental returns of 8% annually), Piggyback Property (permits investments of £1,000 or more and promises returns of up to 30%) and Property Moose (allows investments of £10 or more). The crowd investment model locks in your investment for a fixed term, for example 3 years, after which the property is sold and proceeds are distributed amongst the group. However, often the crowd investor company reserve the right to sell the property at any time and return the net proceeds (which may be less than the original investment) to the investor. For example, Property Partner states that this right ‘intends to cover unforeseen circumstances’ but admits that in this circumstance the investor is ‘likely to receive back substantially less than invested, the timing may be unwelcomed and may result in the crystallisation of taxable income sooner than anticipated.’
So is it worth it?
Investment platforms such as peer-to-peer lending and crowdfunding have given many individuals, otherwise excluded from property ownership, a chance to share in the spoils of the residential property market. In a buoyant rental area where demand is high, the attraction is clear. However, as with all investments there are financial risks and many of these schemes are, as yet, unproven and untested; it will be interesting to see how the market responds to these new ventures.