John Stepek examines the risks and rewards of investing in property via peer-to-peer lending and crowdfunding platforms.
Fancy investing in property, but don’t want to sink a hefty sum into a buy-to-let home or shop? Peer-to-peer (P2P) lending and crowdfunding offer a potential solution. For a low minimum investment, P2P platforms enable you to lend money to individuals for mortgages or to property developers for projects, while crowdfunding sites offer the chance to club together with others to invest in a rental property.
So how does it work and is it worth considering? It’s a huge sector, and I can only really scratch the surface here, but the main thing to remember is that there are plenty of risks, and no guarantee you’ll get your original investment back intact. If you do invest, make sure that it’s money you can afford to lock up for a while – some platforms offer early exit routes but, if you do have to pull out early, there’s the risk that you won’t get your money back promptly, or in full. Beyond those points, the main thing to identify in each case is: what risks you are taking on, and are you being offered a reasonable reward in return?
Becoming a lender
One P2P option is to lend money to individuals or professional landlords to buy residential or commercial property. Platforms that do this include Landbay and Proplend (where loans are secured against property).
Your main pitfall here is “credit risk” – for example, the people you are lending to may not be able to repay you. You can minimise the likelihood of this by diversifying (investing across a range of loans, which most platforms will do automatically for you) and by ensuring that the rental income healthily covers the mortgage payments. You should also check the platform’s history of defaults, although none of the companies in this sector have been through a full-blown property crash yet, so the figures won’t reflect a worst-case scenario.
In terms of returns, the loans are secured (against an asset), which makes them less risky than many forms of lending. So expect the rates to be in the low-to-mid single digits. On that front, the “big picture” risk you take on is interest rate and inflation risk. Lending money to someone at 5 per cent, say, sounds great right now. If interest rates rise, it’s not so appealing.
Funding developers
With this model, you are lending money to fund the development or renovation of a property. Names in this sector include Assetz Capital and Lendy. Something to watch out for here is “development risk”: will the property developer manage to stick to its plan and will its expectations be met? Clearly, many variables can affect this – from the state of the economy (will costs rise by more than expected? What happens if the economy runs into trouble halfway through completion?) to the competence of the developer (have they accounted for the complexities of the project and built in “give” for unexpected hurdles?).
You need to check where you are in the pecking order if things go wrong – in most cases, the developers will have raised funds from a range of sources. Usually, the bank will be at the front of the queue, and the first in line will have the first claim on the assets.
Do your research on the platform and the project. Does the developer have a decent track record? Does the platform have a history of backing successful projects? Overall, this riskier form of lending should offer the potential for correspondingly higher returns.
Buying a share
Another option is to own a share of an individual buy-to-let. Platforms in this sector include Property Partner (which also offers shares in commercial property) and UOWN. For buying a share in the company that owns the property, you get a share of rental payments and capital gains on selling.
The “big picture” risk here is that the buy-to-let boom looks to be over. The UK government is stripping away the tax advantages that once made being an amateur landlord so appealing. As a result, landlords who can no longer make the sums add up are now selling up. That situation is only going to continue as the tax changes are phased in over the next few years.
Yet, even if I felt confident about UK residential property as an investment, I’m not sure I’d invest in this way. You sacrifice a lot of the control you have in owning an individual buy-to-let, and also the ability to “gear up” – use borrowed money to amplify your returns. The fees are also relatively high – it’s like investing in a buy-to-let, then adding a middle-man between you and the tenant. Those layers of costs add up, making it hard to recommend this as a method of investing in property.
John Stepek is executive editor of Moneyweek magazine
