Buy-to-Let: Fractional Ownership vs. Crowd or Peer-to-Peer Lending
One of the safest and most secure investments a person can make is a property investment. While more risky investments like futures trading or stocks might produce high results in the short term, they carry the danger of sudden market fluctuations often causing their values to plummet. Property Investment, in contrast, is a safe long-term investment since capital growth tends to follow an upward trajectory and rents rise in accordance with it. It’s also far more profitable than leaving your money in an ISA or savings account. With this considered, it might be a good idea to consider investing in Buy-To-Let properties.
Such a decision should not be taken lightly. Becoming a landlord comes with many things to navigate before you start seeing a profit. The bureaucratic red tape that comes with managing tenants and property can be very time-consuming. Not everyone has the time or experience to deal with this, but this shouldn’t be a reason to keep you from joining the property ladder. Property companies use a crowdfunding or peer-to-peer websites to raise money. Since you own a portion of the equity, it’s classified as a form of equity investment. Investors can invest directly into one or more properties which are managed by the platform or third-party management company. Crowdfunding and peer-to-peer loans have become very popular with people. This largely hassle-free process has shown itself to be extremely useful for making it easier for people to invest in property.
However, investing in fractional buy-to-let has a one key advantage over crowd lending.
Imagine you have £50K which you wish to invest in property – you have 2 options.
- You can buy into fractional or shared ownership of buy-to-let properties; or
- You can lend the money to property companies for an interest payment on peer-to-peer lending websites.
If you choose the second option, you are likely to earn 6-8% interest on your investment every year but your capital remains as is. If your investment horizon is 5-10 years, your £50k remains £50k at the end of 5-10 years. The interest earned is usually consumed as living expenses.
But if you choose the first option, you could have the best of both worlds. You could earn rental incomes of 6-8% and see your equity doubled up in 5-7 years. This means your £50k could become £100k at the end of your investment horizon because of the inherent nature of property prices going up.
So, unless you have a very short-term investment horizon (18 months or lesser), you would probably be better off with fraction buy-to-let than with peer-to-peer lending.
While a private landlord would own the property themselves and handle or outsource the management themselves, fractional ownership is a more hands-free approach. Instead of owning all of one property, you, and other investors own shares in one or more investment properties.
Property Crowdfunding come in two forms:
The first type is buying a share in a BTL property. This is where the rental income, minus costs, is split amongst the investors. This is a long-term investment which can be secure a steady income for years to come along with capital appreciation inherent to the property.
The second type is riskier and more short term. This is where you buy a share in a property development site and lend to a developer. Once the project is completed and sold, you and the other investors get shares of the profits.
It’s important to know what type of crowdfunding you’re getting into before you invest. Some platforms may not make it clear which type of crowdfunding they’re looking for which can be confusing for first-time investors. Now here’s a look at the pros and cons of using fractional ownership in comparison to a traditional BTL.
Fractional ownership is far cheaper to get into than if you are planning to become a private landlord. A BTL landlord typically requires 25% of the house price to qualify for a BTL mortgage. In today’s housing market this could be in excess of £100k for your deposit, in comparison, you can invest as little as £10k in a fractional ownership property. This makes it far easier for first-time investors who might not have the disposable income needed to pay the BTL mortgage deposit.
Ease of Investing:
Investing in property the traditional way can be difficult for people who don’t have the means to qualify for a mortgage. Whether it’s bad credit, or simply inability to save up for the deposit, there can be many reasons people can’t go through this route. Fractional ownership is open to most investors as long as they have a small amount of money to invest.
It Doesn’t Take Long to Invest:
Investors decide how much they want to invest in a property and once their target is hit, the SPV buys the property. The platform then finds a tenant, decides the rent, and manages the property. While timescales may vary, it should be faster than investing in the traditional way where you’d have to handle everything yourself.
Potential For Returns:
Interest rates are at the point where investing in any way is more profitable than leaving your money in a saving’s account. If you split your investments into several properties, you can generally count on returns of around 7% or, if you invest in one property, it’s more like 4%. Returns are based on a combination of periodic dividend payments and a capital gain when the property is eventually sold, as long as you still own a share.
Security of Investment:
Both private landlords and fractional ownership carry similar risks to the safety of your returns. From tenants not paying rent to void periods where the property lies empty. This can eat away at your ROI.
When you’re a private BTL landlord, you have a far more tangible control on your investment and can accurately plan if there’s any issues. Since fractional ownership is an arms’ length investment, you have far less control. Of course, if you lack the resources to manage and maintain a property this is great, but if you have an issue with the way that the property is being run or your returns, there is little you can do other than sell your share. This can cause you to lose money on your investment in the worst-case scenario.
Since you are using a third party to invest, some of your returns will be eaten up by fees paid to the SPV. This means that you’d be earning a bit less than if you were to traditionally get onto the property ladder and do everything yourself.
The long and short of it is, whether you are going into private land lording or fractional ownership, your property investments will be entirely based on your circumstances. If you lack the time or resources to properly manage the property, then fractional ownership may be best for you as it can be done affordably and with very little hassle. On the other hand, if you prefer to have more control of your investments and keeping most of the returns for yourself (and of course have the capital and time required) then becoming a private landlord might be more up your ally. It’s always good to speak with a financial advisor to help you decide what’s best for you.