This means clubbing together with other investors to buy property, with the aim of making money from rental income and a profit on resale. It is arranged by a company which sets up a “special purpose vehicle” to hold the real estate; the investors become shareholders. You are collectively buying mortgage-free, and the idea is that the company running the scheme has the know-how to find the right deals and handle the management side.
The House Crowd’s model is to buy rundown houses in the northwest at about £50,000, spend £5,000 to £10,000 on refurbishment, let them for three to five years, then sell for a profit. You can invest from £1,000 and members have bought 69 properties since launch in May 2012. It has just raised the money to buy a two-bedroom terraced house in North Manchester. The price is £53,000, with initial costs of £15,000 expected, making a total investment of £68,000. The House Crowd predicts the property will deliver a gross yield of 8.8 per cent before maintenance, repairs and void periods, and will be worth £88,500 in five years’ time, assuming capital growth of 5 per cent a year. The company takes a 25 per cent cut of profits.
Other platforms include Property Moose, which has a lower minimum investment of £500 and an initial fee of 5 per cent to cover overheads, and takes 15 per cent of profits when money is distributed. Investment crowdfunding platforms are now regulated by the Financial Conduct Authority. They are required to be transparent in their dealings and to ring-fence clients’ money, which means you will still own your share of the property if the platform goes bust. However, there is a high level of risk because the property market could tumble, and it might be difficult to find tenants or get them to pay their rent. You are not protected by the regulator’s savings compensation scheme, so could lose all of your investment.
Peer-to-peer mortgage lending
Investors who are fed up with the paltry rates offered on savings accounts have been turning to peer-to-peer lending. The latest development in this fast-growing market sees investors pooling money to lend to mortgage borrowers. As with peer-to-peer personal loans, the idea is that lenders get a better return than they would in mainstream savings accounts and borrowers benefit from terms that aren’t available on the high street. Again, a company acts as intermediary and packages the mortgage in return for a share of profits. The schemes are FCA-regulated, but once again you cannot fall back on the official Financial Services Compensation Scheme if things go wrong.
LendInvest permits lending on both residential and riskier commercial properties and advertises an average net return of 8.15 per cent a year. The firm is a spin-off of Montello Capital Partners, the bridging loans provider, and has already arranged £68 million of loans, including the record peer-to-peer loan of £4.2 million.
The minimum investment is £10,000 and you can fund whole loans or parts of loans. As with all mortgage lending, there is the risk of borrowers defaulting but the company says it carries out stringent checks of borrowers and all the loans are secured against property, which can be sold to pay investors if necessary. You can lend sums from only £100 with Landbay. All Landbay loans are for residential buy-to-let mortgages and you can earn 4 per cent to 10 per cent, depending on the level of risk. Other property peer-to-peer lenders include Wellesley & Co and First Great National.
The expert’s verdict
Kate Faulkner, of Designs on Property, the property consultants, is cautious about property crowdfunding. She says: “Getting hold of properties at a discount in the current market is extremely difficult, so the deals you get are likely to be in areas where capital growth is not that great.”
She prefers peer-to-peer mortgage lending, but is still nervous, saying: “Typically, people who borrow to put a roof over their head in the UK do what they can to always pay their bill. It is vital that borrowers are vetted properly, though.
“My view is that if you’re OK to put the money on a casino bet, say roulette number 24, this kind of thing is the equivalent. In other words, you have to be able to afford to lose the money. In both cases you would need professional advice and must appreciate the very high risks involved.”
Patrick Connolly, of Chase de Vere, the adviser, says: “We don’t recommend residential property investments to most clients. Many people already have a significant proportion of their wealth tied up in this asset class through their homes.
“For those with large diversified portfolios, direct buy-to-let investments might be suitable, but only after thorough research is undertaken and, if necessary, professional advice obtained.
“If people are keen to invest smaller amounts in residential property, the Housa investment from Castle Trust could be considered. This pays returns based on the performance of the Halifax House Price Index.
“We do recommend commercial property funds which invest in ‘bricks and mortar’ properties. Funds we use include Henderson UK Property and M&G Property Portfolio.”