Looking for a way to invest in the buy to let market? Crowdfunding platforms are making it cheaper and easier.
If you’re after a return on your money that’s safe as houses, there’s still no better bet than bricks and mortar.
“The combination of low interest rates, strong house-price growth and the rising demand for rental property means the buy-to-let market continues to flourish.” So says mortgage broker David Hollingworth of London and Country Mortgages.
And, according to Hollingworth, it doesn’t look like this current climate
will cool any time soon. Since June 2010, the average asking price of property in London has increased by almost 50 per cent, or £195,000, according to a new report by UK property website rightmove.co.uk. This compares with a £6,374 (3.7 per cent) rise in the North.
Buy to Let Mortgage Options
But buy-to-let isn’t a cheap option. Mortgage lenders are typically asking for a 25 per cent deposit on a buy-to-let mortgage. And they will generally only lend at five times your salary. There is a cheaper and less risky way you that can capitalise on the buy-to-let boom. One option is by investing in rental property via a “crowdfunding platform” such as Property Partner. These “platforms” allow large numbers of investors to put small amounts of money in to fund the purchase of a rental property. This way, you can invest in property indirectly and potentially spread your money across a number of properties rather than putting everything into just one purchase.
So, how does this crowdfunding proposition work? Owning property with a group (potentially dozens) of investors means you’re likely to have less control over the management of the property. Property Partner’s website, for example, lists various London properties in which investors can buy a share, with a minimum of £50. The website charges a one-off transaction fee of two per cent, which you pay upfront, and 12.5 per cent (plus VAT) of the rental income to manage the property.
Once the money is gathered and properties are bought, each investor will then receive a portion of the monthly rental income. You can choose which areas and properties you’d like to invest in. On most platforms, property maintenance costs are taken from the rental income. There is the possibility for the platform to borrow against the property in certain cases, the cost of which will be borne by the owners. Returns vary widely from platform to platform but generally are estimated to range from around three per cent up to as much as 12 per cent.
After a set period (usually around five years), you can sell your stake at market value and take a share of the capital gain (or loss). To get out earlier than the five-year period, you could list your property share for “resale” via the platform’s website.
What happens if property prices fall?
Of course, if house prices fall, your capital is eroded. And you could also be exposed to periods where your investment property doesn’t have any tenants, therefore creating no rental income. In these cases, your capital is at risk and it can be difficult to sell your investment. Some platforms have created “exchanges”, where you can sell your investment on to another buyer, but this is only useful if there is demand. If there isn’t, you may find yourself having to sell out cheaply.
Because residential real estate crowdfunding platforms are a relatively new phenomenon, the Financial Conduct Authority hasn’t yet worked out how to fully regulate them. Property Partner is one of the few that’s regulated by the FCA, so it has to follow certain rules that are designed to protect your money.
Other Investment Options
If all this still sounds too risky, there are other ways you can invest smaller sums in property. You can get involved in peer-to-peer lending to buy-to-let investors. This is where you basically invest in a share of a fixed-rate mortgage.
“Other options for those looking to put smaller sums down to give exposure to property could include Hearthstone, which is an investment fund,” says Hollingworth. “Castle Trust also offers products where the returns are linked to increases in the Halifax House Price Index (not rental income).”
According to Property Partner’s website, more than 1,000 people have so far invested sums ranging from £50 to £50,000 in homes through their platform, with the average investment size rising continually since launch.
So, if you still want to get in on the buy-to-let boom by taking a stake in the actual bricks and mortar, this could be the perfect way to get your foot in the door. ML
- Do your homework
Look for a crowdfunding platform that’s transparent about fees, charges and extra costs
- Treat this as an investment, not a property purchase
The rule is never to invest what you’re not prepared to lose
- Be realistic about returns
Plan for void periods
- Work out your exit plan
Look at how easy it is to get your money out before you put it in
- Research locations
Invest in residential property that’s in a des-res rental area with quality housing stock and good transport links
Making the Headlines
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