Buy-to-let has offered attractive returns for investors in recent years, but several regulatory and tax changes could close the door on this once booming sector – is there an alternative on the horizon?
Landlords are already facing an extra 3 per cent stamp duty on purchases of second homes, as well as the end of the wear-and-tear allowances and new requirements to check on the immigration status of tenants.
That’s even before April 6 when landlords will no longer be able to deduct the full mortgage interest costs when determining profit, and by 2020 will only be allowed to claim a basic rate allowance of 20 per cent.
All this is likely to hit the profits and tax perks that buy-to-let once offered.
Instead many buy-to-let investors are turning to crowdfunding and accessing the returns that property offers without the hassle of managing tenants and collecting rents. But this growing area still has risks.
There are two types of property crowdfunding. Investors can use the equity crowdfunding route in which platforms such as Property Partner, The House Crowd or Property Moose collect a pool of money to fund a property development. Investors get income from the rent paid and, in some cases, a share of any capital gains at the end of the investment.
Frazer Fearnhead, founder of The House Crowd, says there is an “increasing burden of legislation, regulation and taxation” on buy-to-let in the UK. “Many are saying it is effectively dead. If it is not dead then it is certainly in dire straits. Crowdfunding takes all the hassle away and makes it a passive investment where you can rely on the expertise of property experts,” he says.
Alternatively, there is debt crowdfunding, or peer-to-peer (P2P) lending, where investors fund buy-to-let, development or bridging loans and receive interest from repayments made by the borrower through platforms such as Landbay, LendInvest or Saving Stream.
Almost £700 million was lent through property P2P or crowdfunding platforms in 2015, according to think tank Nesta’s latest Alternative Finance Industry report. The majority, £609 million, came from P2P loans and £87 million was through equity crowdfunding.
How property crowdfunding works
One investor, Samantha Williams, 45, had a buy-to-let portfolio of three properties in Wales but decided to put the sale proceeds of one into property crowdfunding last year. She invested £20,000 in Saving Stream, which provides finance for bridging loans on UK property, and is earning returns of around 12 per cent.
Ms Williams says: “The rules and regulations around buy-to-let are getting more onerous, it is much harder to make a profit. Crowdfunding is an alternative especially as it is not worth putting the money in a savings account.”
Unlike traditional buy-to-let, there is none of the hassle and time-consuming administration that comes with being a landlord. You don’t have to worry about collecting rent or finding and dealing with tenants as all the property management is arranged and dealt with through the platform.
“Property crowdfunding not only removes the financial and bureaucratic barriers to entry, but also makes it much easier for buy-to-let investors to spread their risk,” says Rob Weaver, director of property at Property Partner. “Instead of investing in one or two properties often in a single location, our platform allows anyone to buy shares in multiple properties all around the UK. Mortgages, solicitors, tenants and maintenance are all dealt with by us – and at rates far lower than the mainstream agents,” he says.
The entry costs are also lower with crowdfunding. For a typical buy-to-let mortgage you may expect to pay a 25 per cent deposit, which, based on the Halifax average UK house price in December 2016 of £222,484, would be £55,621. In comparison, some crowdfunding platforms such as Property Moose have a minimum investment of £10, while Saving Stream has no minimum.
There are also no fees to pay for investors, unlike with a buy-to-let mortgage where you could pay thousands of pounds in application fees and the lender will expect the rent to cover a certain amount. As well as the smaller contribution, the earnings potential can also be higher than both buy-to-let and a traditional savings account.
The average rental yield on a UK buy-to-let at the end of the third quarter of 2016 was 4.4 per cent, according to the Kent Reliance Buy to Let Britain report, while Bank of England data shows savings rates are well below inflation at on average 0.85 per cent for a one-year fixed-rate cash ISA.
Crowdfunding returns can range from 3.75 per cent with P2P buy-to-let lender Landbay, to 12.7 per cent with LandlordInvest. Both these lenders also have permissions to offer so-called Innovative Finance ISAs, letting investors earn income tax-free.
Investors also experience more transparency than you would get from a lender as all platforms display details of arrears and defaults, and most have provision funds aiming to cover losses.
However, crowdfunding and P2P is an investment rather than savings product, so you are taking on more risk for a potentially higher return that is not guaranteed. All platforms must be authorised by the Financial Conduct Authority, but there is none of the Financial Services Compensation Scheme protection that you would get from a mainstream banking product, unless a regulated financial adviser suggested you invest.
This means if a crowdfunding or P2P platform goes bankrupt, you could lose any money invested. There is an added security of a property underlying each investment, but there is no guarantee of the price you would get if it was sold.
Investing in buy-to-let may have the look and feel of being a property investor or landlord, but you are essentially putting your trust in a platform finding the right tenant or borrower. You will also be responsible for your own due diligence and diversification when choosing the project and platform.
Some P2P property lenders will automatically spread your money across a number of loans, but with others you will need to spread the risk yourself by choosing individual loans. It may also be hard to get your money out quickly as you would need to find a buyer on the platform’s secondary market rather than selling the property yourself as a landlord.
Ultimately, traditional buy-to-let and crowdfunding will both always need property developers and landlords so their businesses have someone to lend to. Both have their place, so it will be up to the investor to understand the risks and rewards.