The pros and cons of alternative property investment and crowdfunding

 

With tax changes and stricter lending rules making it harder for some to finance a property purchase, investors are increasingly looking to navigate the challenges in the buy-to-let sector.

It’s why setting up a limited company through which to buy and operate rental properties is growing in popularity.

However, buy-to-let is only one way to get involved in the property market: other investment strategies may also suit your preferences, your yield expectation, and your risk tolerance.

Property crowdfunding

This works very simply: a limited company known as a ‘Special Purpose Vehicle’ (SPV) is set up to buy a property, and you invest via the SPV. Unlike buy-to-let, there are no mortgages involved –  the SPV works as a company, and your investment amounts to shares in this company.

As any landlord should know, renting a property comes with the risk of void periods, where there’s no rent-paying tenant in the house. Look for crowdfunding platforms that mitigate this risk by agreeing long-term assured rental agreements.

The core disadvantage is that the process of exiting can be somewhat frustrating. A majority of the shareholders need to vote to sell the property, otherwise you need to sell your shares to a willing buyer, which can take time.

Peer to peer lending

Peer to peer lending has exploded in popularity because it offers investors high interest rates paid over relatively short time periods.
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There is obviously a level of risk involved – the property is used as security, and if house prices drop suddenly then you risk losing some capital. That’s why it’s important to consider the loan to value ratio (LTV) – for example, if this is 75%, the borrower can borrow three quarters of the value of their property. This means house prices would need to fall 25% before the investor made a loss.

It’s also important to consider the possibility of a borrower repaying later than the advertised term. This can and does happen, mostly for delays that can occur in refinancing or arranging a sale of the property.

Penalty clauses are built into peer to peer loans to protect investors, and they can earn a higher rate of interest when this happens. But don’t invest money you will need by a certain date, and be sure to diversify your portfolio to mitigate the risk of having your capital tied up for longer than expected.

Property development crowdfunding

Some types of development investing can involve a high reliance on bank leverage. Using crowdfunding to finance property development reduces this risk by effectively removing banks from the equation.

Investors receive their returns once sufficient properties have been built and sold so, as with any investment, it pays to do your homework.

Consider whether the development has full planning permission in place, if contractors have penalties in place for going over their deadlines, and, of course, the location and pricing to target buyers.

Another effective way of investing in property developments without going down the crowdfunding route is off-plan investment projects, which we specialise in at BuyAssociation. Click here to see our investment opportunities.

Innovative Finance ISA (IFISA)

Finally, an Innovative Finance ISA provides a way to invest in property completely tax free.

Most peer to peer lending companies offering property IFISAs work in a very straightforward fashion: you can invest up to £20,000, which will be diversified across a portfolio of peer to peer loans – each one secured by a legal charge over a UK property or land asset.

Frazer Fearnhead is founder of The House Crowd – a peer to peer lending and property crowdfunding platform.

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The pros and cons of alternative property investment and crowdfunding

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