Get into buy-to-let for just £10: New breed of crowdfunding sitesever to be a property investor – but is it wise?
Get into buy-to-let for just £10: New breed of crowdfunding sites make it cheaper than ever to be a property investor – but is it wise?
By MARC SHOFFMAN
PUBLISHED: 17:40, 28 May 2014 | UPDATED: 16:32, 29 May 2014
Being a buy-to-let investor has meant decent returns over the past two decades but the life of a landlord is not without its stresses – and costs.
You have to work hard to find the best areas for rental income and growth, maintain a property and keep it tenanted, but the biggest barrier to entry is finding the substantial amount of money to put down as a deposit to buy in.
So it should be no surprise that the combination of Britain’s obsession with the property market and the rapid growth of alternative finance, has delivered new routes for investors to get into property, with both lend-to-save and crowdfunding offering a way in for as little as £10.
Follow the crowd: You could invest in property without the hassle of being a landlord
Buy-to-let is not an easy game to get into. With lenders asking for a minimum deposit of around 25 per cent of a property’s value, an investor would need to find £37,500 to get a buy-to-let mortgage on a £150,000 property – and that is before buying costs have been taken into account.
But new ways of owning a property have begun to emerge from the lend-to-save and crowdfunding industry giving investors a chance to put money into a combined pot of buy-to-let loans or property developments and providing new routes to finance for landlords and developers.
Several platforms are now providing exposure to the property market by combining small amounts of loans from investors that are then used to either lend to buy-to-let borrowers or buy developments and provide an income from the rent, with annual returns offered at up to 10 per cent.
There are two ways to invest in buy-to-let, either through crowdfunding, where a number of investors group together to buy and rent out a property, or lend-to-save where you can lend direct to a borrower.
A number of websites are offering pooled investments in property developments that are purchased by a management company and then provide income from the rent.
This is what the regulator would call the equity crowdfunding route, where you could either put money into a pot of other investments that goes towards buying a property that is then developed and rented out, giving you rental income and sometimes the proceeds of any sales.
Alternatively you could put money into buy-to-let loans that are provided to borrowers seeking finance for their own properties, this would come under lend-to-save or debt crowdfunding.
The idea with this route is that investors or lenders put money towards one loan that goes towards a borrower and they each receive a rate of interest based on the repayments.
Borrowers go through the same checks as they would with a mortgage lender such as affordability and credit assessments.
How much will will it cost?
The minimum investment can be as low as £10 on some platforms, but you will have to pay tax on returns. There are plans to let you put peer-to-peer lending into an Isa which would mean your returns are tax-free, but the details on this are still being ironed out.
Most of the platforms won’t charge you upfront fees but charges are taken out of any profits or loaded into the rate you get.
Borrowers will have to pay application fees and the rates on offer are above the market averages, but they are getting loans faster and for different time periods than what banks can provide.
The crowdfunding industry is now fully regulated by the Financial Conduct Authority, so providers have to build and maintain viable businesses, with the watchdog checking up on their processes.
This also means that these types of platforms have to make sure investors understand the risks of a project and conduct thorough due diligence on borrowers.
Some lend-to-save firms have ways to safeguard your money, but unlike with a savings account you will not get the deposit protection of the Financial Services Compensation Scheme.
Is this riskier than being a landlord?
While this is a cheap and quick way of getting into buy-to-let, there are risks to either the lend-to-save or crowdfunding investments compared with just becoming a landlord.
You don’t have to worry about the costs and responsibilities associated with being a landlord, such as finding tenants yourself and maintaining the property. But you have no control over who the tenants are or how the property is managed, as you would with a normal buy-to-let, and in some cases you don’t know who you are lending to, or where the property is.
You are also locking yourself in to investments that it may be hard to exit early. Platforms say you can sell out to other investors to get out sooner, but what if there are no other buyers to take on your share?
There are also risks that house prices drop or rental yields fall, which would affect the landlord’s ability to keep up with their repayments and if they default it could mean you get less than you hoped.
Ultimately, this is a situation where higher returns are coming from higher risk.
Your risk is rewarded with tempting returns of up to 10 per cent a year, far more than what you would get in a bank account or cash Isa, but that money would be protected by the Financial Services Compensation Scheme and this is not.
Remember also that you are dealing with the risky end of the property market here. House prices are rising now but there are serious fears over affordability and there is pressure on the Bank of England to act to steer overheated parts of the market, such as London, away from bubble territory.
If another house price slump arrives an investment in property will be hit both on value and how easy it is to sell on. Landlord mortgages will also take a hit, as will loans financing development. It is worth bearing in mind that in a property slump the first hits are typically taken by developers and borrowers at the riskier end of the scale, for example, those who have turned to higher interest rate mortgages – this is essentially what some of the lend-to-save firms here are offering.
Price risks: House prices are about a third above their long-term relationship with wages – and that average is skewed upwards by the unprecedented 2000s boom
Price risks: House prices are about a third above their long-term relationship with wages – and that average is skewed upwards by the unprecedented 2000s boom
Invest in a property with others
The House Crowd
The House Crowd lets investors put money into properties, currently focused around Manchester.
It was founded by property investor Frazer Fearnhead and has a team of surveyors and developers.
A limited company is set up that buys a property and appoints a lettings company to manage and rent out the property.
Investors are shown details of the properties before putting money in.
There are two investment models. The income generating model, which has a minimum investment of £3,000, offers a return of 7.5 per cent and pays income every six months. The minimum investment term is 18 months.
Alternatively there is an income and capital growth model where with a minimum investment of £1,000, you could get a return of 6 per cent and any profits from the sale of the company are split 50/50 between you and House Crowd.
All money is held in a solicitor account until a property is purchased.
Once a property Is purchased you own a share in the legal charge over the property, so if The House Crowd went bust you would still own part of the investment and would, in conjunction with other investors, either appoint someone else to manage the property or sell it.
Investors will vote once a year on whether they want to sell a property and it will be sold if over 50 per cent want to, or if the value has increased beyond 25 per cent since refurbishment.
The House Crowd does not charge any fees to investors as it makes money from the sale of the properties.
You can exit early in the investment term either by letting the House Crowd find a buyer for your shares or finding your own.
If the House Crowd finds a buyer then you will just get back what you invested plus your dividend payment, if you sell your own shares you can come to private arrangement.
Property Moose was founded by three experienced property investors including James Cadbury, great grandson of the well-known chocolate maker John Cadbury.
Investors can put as little as £500 towards properties that are found through a network of agents, purchased through a ‘special purpose vehicle’ and then generate income through rent.
Each investor will receive a legal share in the SPV, depending on how much they have invested.
Investors will get rental payments annually and will receive a portion of the return once the property is sold.
The management of each property is outsourced to a third party. The aim is to find properties with a minimum yield of 8 per cent.
Investors can look at properties on the Property Moose website and decide whether it is worth investing based on information provided on the project and their own research. For example, the site is currently trying to raise funds for four tenanted apartments in Cumbria. It wants to raise £136,000 and has an investment term of three years, offering an annual yield of 6.23 per cent.
At the end of the fixed investment term all of the investors will be able to request a vote on retaining the property for another year if they think it is not the right time to sell. If 85 per cent of the investors agree then the property is kept on for another year. Investors can request another vote at the end of the following year if they are still not ready to sell.
Investors will have to pay five per cent of the property price as part of a fundraising fee once all funds are raised, this helps pay towards the costs of sourcing the properties, managing the sales and getting them ready to rent. Property Moose also takes a 15 per cent fee from the annual dividend and final sale.
Your money is protected by legal charges on the properties so they can be sold if the businesses involved fail. Even if the platforms collapse, your still own a share in the properties but that doesn’t make it as safe as houses.
While this type of model provides a cheap entry point for those wanting to get into buy-to-let, you are getting a lot less control than you would if you did it yourself. When you run your own property portfolio you can buy and sell whenever you like.
But with this model you need approval of other investors to buy or sell a property, so if you are in the minority it could mean carrying on with an investment you don’t like or finding a buyer happy to take your share. This may not be as easy as just selling a whole property and taking the profits.
You are also taking a punt on house prices continually going up, as you would in the traditional buy-to-let sector, but this area is less well-known so it may be harder to find a buyer if you needed to make a quick exit to take profits while you can.
Managing a buy-to-let yourself comes with its own tax reliefs, but you are giving that all up with these models and trusting someone else to manage these properties and keep them tenanted.
Rents vs yields: Both have remained fairly static so far in 2014
Invest in a landlord’s mortgage with lend-to-save
Landbay provides three-year fixed rate buy-to-let mortgages that have an overall five-year lifespan, which are funded by investors through a peer-to-peer lend-to-save platform.
Lenders can choose the type of buy-to-let mortgage they want to fund across three risk bands that reflect the loans-to-value on offer, from 60, 75 and 80 per cent or A+, B and C bands respectively. They can also set their own rate of interest that they would prefer to get on a loan.
Returns are set by investors and range from 4 per cent to 10 per cent depending on the risk category.
Lenders don’t see a choice of specific projects to put money into as the process is automated to spread their funds across a number projects. This helps diversify their risk.
They will only see how their money is being used and what properties they have lent against once it is allocated, but they will not see any names or addresses of borrowers.
The minimum investment is £100 and each loan is split into £10 sections. Your money can be spread across one or a number of risk bands.
Once you open an account you have to select how much you want to lend and what percentage of your money you want to go in each risk category and the rate you want to receive at each level.
The idea is that mortgages are made up of hundreds or even thousands of investors financing them, with the rate for the borrower calculated from an average of what the ‘crowd’ have asked for.
So if you agreed to lend £5,000 you would have to choose what percentage you would like to provide in each risk category.
The site currently has 150 lenders who will contribute towards three mortgages over the next fortnight, with another five expected in the coming weeks. The three mortgage values are £185,000, £100,000 and £175,000.
Landbay is targeting to lend £1million by the end of June and £5million from more than 1,000 lenders at the end of the year.
The borrower has one mortgage agreement but it is funded by the crowd, while each investor will receive their preferred rate of interest based on what they have paid in.
Borrowers have to pay an application fee of between 2 per cent and 2.5 per cent and can get a decision in principle in 48 hours.
The mortgages are for a five year term, but borrowers can remortgage with no penalty after two years. when that initial fix ends, the borrower’s mortgage will move to a reversion rate of 4 to 4.5 per cent above Libor, depending on the loan-to-value.
The application is checked by Landbay’s underwriters and it uses Experian to do a credit check on borrowers and uses its own valuers to assess the property being lent on.
A legal charge is taken over the property, which protects your money if the borrower defaults. If a borrower defaults and the property is sold, any returns are first given to those in the A+ 60 per cent LTV band. There is also a protection fund to cover any losses for those putting money into the A+ band if a borrower was to default and the proceeds of the sale did not cover losses.
Lenders can exit the loan early If they can find a buyer on Landbay’s secondary market to take their investment off their hands.
Lendinvest helps both those who want to lend towards a buy-to-let loan and those looking to borrow to build their portfolio.
At any one time it offers three or four different options to invest in loans that will then be taken out by landlords or property investors
There is no upfront fee for investors using LendInvest, as this is loaded into the return they receive.
The annual return is between 6 and 10 per cent.
Investors have to put in a minimum of £10,000, but this may be reduced in future.
Once you have registered you can view a choice of mortgages to put money into.
You can lend for between one month and five years. You can see details of the location and use of the property, the value of it and how much the borrower is seeking as well as the borrower’s exit strategy and how long the loan is for.
The site will also show how much has been invested and how much is left to raise.
Your money is protected by a legal charge on the property in the same way a bank would be protected if a borrower defaulted on their mortgage.
Lendinvest makes its money from fees it charges to borrowers and offers mortgage rates of between 9 and 10 per cent.
This is well above the market rate but the site argues that decisions and loans can be made in a matter of weeks compared with waiting months by going through a bank.
Lendinvest finds and checks borrowers by using brokers and assesses properties with independent valuers.
Like any bank it also conducts credit searches and uses solicitors to do background checks n people wanting to borrow money. It also lends at very conservative loans to value of 60 to 75 per cent.
Wellesley & Co.
Wellesley was set up by former traders and bankers.
It matches its lenders against high quality borrowers who need a secured mortgage on property. The typical borrower needs a loan for between six months and two years and is normally a property investor or developer.
The returns for investors range from 1.5 per cent for shorter one month loans to between 3.75 and more than 7 per cent for lending of 6 months and upwards. The minimum investment is £10.
The loan rate for the borrower is set by Wellesley.
Lenders do not see who or what type of property they are giving money to, but borrowers are put through a rigorous credit check by Wellesley which considers the type of applicant, their property history and their development plans.
A legal charge is taken against the property, so if the borrower fails to repay then the property can just be sold.
There is also a provisional fund, run by Wellesley, designed to allow lenders to apply for compensation if a borrower defaults.
Investors lend for between a month and five years but you can get your money out early if you can find another lender to take your place.
There is no charge for lenders but borrowers have to pay a 2 per cent fee.
All these websites have processes to check your are lending to viable borrowers, such as using brokers, valuers and credit reference agencies.
You also have protection from a legal charge on the property and in some cases a pot of money that can protect some of your investment.
Ultimately, though you are at the mercy of landlords and developers paying back their loans.
Remember with lend-to-save there is a reason that the returns are so much higher than on a savings account – it is because of the level of risk.
You may not always see who you are lending to and ultimately there is non of the protection from the Financial Services Compensation Scheme that you would get on a traditional savings account.
In fact, you don’t even get the £50,000 level of compensation that you get through the investing part of the FSCS, which protects you against losses from providers going bust – not from investments going down in value.
The FSCS will protect up to £85,000 of deposits and £50,000 of investments per banking or investment group, but this type of buffer does not stretch to lend-to-save models and while there are back-up funds available, there is no guarantee that they will always be there when you need them.
Read more: http://www.thisismoney.co.uk/money/mortgageshome/article-2636370/How-crowdfunding-making-cheaper-property-investor.html#ixzz367T8dwl1
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