In my line of work if you see a headline which reads, ‘Buy-to-let gone mad or a safe way to invest in property?’, then you’re likely to click on the story. Which is exactly what I did and read a piece on the ThisisMoney website which was about a property crowdfunding business which apparently had sold a £213k two-bed in Byfleet to 126 buyers in 35 minutes. The crowdfunder is able to do this by issuing stocks in the properties themselves and those that invest own those stocks; rental income is proportioned up and paid back and the idea is investors will be able to access any capital gains in the future as well.
Now, while I’m extremely positive about property investment in all forms, and while this (on the whole) looks like a good idea in principle, I still can’t help being slightly nervous. In my experience, propositions that look too good tend to have a way of not panning out as expected. Indeed, our industry is littered with the financial problems of those who were caught out pre-Credit Crunch by, for example, the property clubs – who if you remember sourced the property, sourced the mortgage and (said) they would source the tenant. Looking at property crowdfunding, I see a lot of similarities to property clubs albeit with a different twist.
Of course, clubbing together with others to buy property is nothing new – it is after all the way building societies were established – and we continued to see, for example, friendship groups doing just that to buy a home to live in, especially first-timers, so that they can get onto the property ladder sooner rather than later. There is, of course, nothing stopping friends buying investment property either – lenders’ criteria permitting if they want to access finance – and again done with a small group with clear rules around costs, exits, etc, then this could, to my mind, work well.
However, let’s extrapolate that out to buying shares of properties with strangers, and not just a handful, but many hundreds who you will never meet or know, neither will you have any clear idea of their intentions and what they are looking to get out of such investment. Then, there is also the issue of the property itself which is advertised on the crowdfunders’ website with details such as price, but also its estimation of rental yield. And I might also add, that each investment comes with a 2% one-off fee of the amount invested for the crowdfunder, while it will also manage all aspects of the letting for 12.5% (plus VAT) of the gross monthly rental income. Which seems rather steep in what is an incredibly competitive marketplace.
Also, will the crowdfunder actually manage the letting or will they sub-contract to a local agent ‘at a price’? Believe me you get what you pay for when it comes to letting agents and there’s very good reasons why some are so cheap. Indeed, while the crowdfunder appears to be making strong returns with its fee charging and its letting agent agreement, what guarantees are in place for the investor themselves? What about rental void periods for instance – how are these handled?
Essentially, in all of the excitement around investing in property and the fact this can be done for a fraction of the price of buying one outright on your own, are potential investors in possession of all the facts about what they are getting themselves into? Firstly, do they have enough information to ensure the right house/flat is being bought at the right price in the first place? With such an investment, I would suggest there needs to be an awful lot of due diligence carried out in order to satisfy yourself of the valuation, the rentability, plus let’s not forget that rental properties come with other costs – ground rents, decoration, insurances, the list goes on. How are these to be covered and paid for, and how much will they eat into the potential return?
Surprisingly you might think – given my reservations – overall this does seem like a good idea but there are caveats that come with it. This concept is likely to be replicated and corrupted over time and it could quickly mushroom out of control – just like the property clubs did – with crowdfunders offering ‘unbelievable deals’ because of competitive pressure. This means they’ll be having to do their own deals in order to buy property at discount from builders/developers, with the need to have ever-increasingly optimistic modeling around achievable rental income/arrears/voids, etc. Investors in these operations could soon find themselves back in a situation which will be all too familiar to those who saw how the clubs worked in the middle of the last decade.
It’s a market we don’t want to return to and therefore my advice on this one – particularly to what I believe might be the target market, those pensioners who want to access their pension pots to invest in property, but don’t have enough to buy one outright – is to be ultra-cautious. The funders will think this is an unfair analogy but I certainly fear a payday loans situation here – we may look back in years to come and wonder why we ever allowed the genie out of the bottle.
Bob Young is chief executive officer of Fleet Mortgages