Property is an appealing investment: it’s been proven (in a favourable market, of course) to increase in value and it’s a tangible, useful asset. But the buy-to-let market is impenetrable for some, and it’s due to get worse. High investment thresholds aside, as of next year, buy-to-let investors won’t be able to offset any mortgage interest against their profits.
This is where peer to peer (P2P) property investment comes into its own, as a viable alternative to buy-to-let. You can start investing in P2P property loans (in the form of a short-term bridging loan to a homeowner or to a property development project, for example) with £1,000 or less, based on your choice of platform.
The interest rates are good, too – you can earn up to 10% p.a, although this depends on the assessed level of risk. What’s more, you don’t have to experience the hassle of finding tenants, managing the property, or paying any agent fees.
Of course, as with any investment, P2P lending comes with a risk warning – but as long as you do your own research and thoroughly asses the options available, it can form a healthy part of a diverse investment portfolio. There are a key types of P2P property lending to know about if you’re thinking about getting started – so let’s take a look at the different options.
Bridging loans are typically short-term loans made to people looking to fund a property transaction (e.g. homeowners and property developers). They appeal to borrowers because they allow them to avoid jumping through all the hoops that traditional financial institutions like banks require.
And, because the loan terms can be as short as three months in some cases, they can be useful for investors who want to make some money a bit faster. However, this is not guaranteed as it is dependent upon the borrower paying back the loan on time.
Moreover, due to the UK’s ongoing housing shortage, demand for new developments is high. Investing in P2P bridging loans to help fund development projects allows investors to contribute towards solving the problem (and earn a return in the process). Just make sure that any investment platform that deals with property development funding can prove that it has full planning permission in place, uses large, reputable contractors, and works with the Royal Institute of Chartered Surveyors (RICS) before parting with your money.
Innovative Finance ISA (IFISA)
The Innovative Finance ISA (IFISA) provides a tax-free way to invest in P2P lending. It was only introduced in 2016 but it has quickly grown in popularity, with £270 million invested in only its second full tax year of existence (2017/18).
However, there is still a lack of IFISA awareness, at least when compared to cash ISAs and stocks and shares ISAs. Investors are missing out, since IFISAs typically offer much higher returns than your standard cash ISA, and potentially less volatile returns than stocks and shares ISAs.
For example, The House Crowd’s IFISA has a target return of 7% p.a., while most cash ISAs currently available barely top 2% p.a. However, with increased returns comes increased risk, and in contrast to a cash ISA, your capital is at risk when you invest in an IFISA (and indeed P2P generally): it is not covered by the Financial Services Compensation Scheme (FSCS).
IFISAs can be based on P2P consumer, business and, of course, property loans. It’s worth remembering that not all IFISAs will be fully secured against the underlying value of the asset, so you’ll need to assess the level of risk you’re willing to assume before investing.
Another tax-efficient way to invest in P2P property lending is via a pension scheme, with two popular options being the Small Self-Administered Scheme (SSAS) and the Self-Invested Personal Pension (SIPP).
The SSAS is one of the most flexible pension schemes in the UK. It’s usually established by limited companies exclusively for directors, senior employees and family members, as it allows you to use your pension plan to invest in the business.
In comparison, a SIPP allows you to invest in a wide variety of ways, including via P2P property lending, and enjoy the associated tax benefits that come with a pension. However, each SIPP will have its own rules which determine the type of investments that may be held.
P2P lending can potentially offer valuable access to impressive returns within the context of a well-diversified pension pot, but you must assess all of the risks associated and consider how any potential late repayments might affect your retirement planning. For example, what would happen if there was a delay when you wished to access your tax-free cash at age 55?
Tips and advice: what to do before investing
1. Check how your investment is secured
Ideally, any P2P property investment that you make should come with a certain level of security.
Some platforms use a legal charge against the borrower’s property to force the sale of the asset in the event of a default, in order to repay investor capital. Others will operate a reserve fund to pay out any compensation to investors in the event of loan defaults or the platform fails. Either way, it’s important to investigate and understand the security measures that are in place for your investment.
However, it must be emphasised that none of these measures provide cast-iron guarantees and your capital is always at risk. As confirmed above, P2P investments are not covered by the FSCS.
2. Make sure you know how due diligence is conducted
If you are spending the time conducting research before parting with your money, then your investment platform should, too. They should do the necessary research prior to launching a crowdfunding campaign and make this information available to you before you part with your money.
If, for example, you are lending money to a property development project, you’ll want to know whether a RICS survey has been completed, whether there is any feedback from local agents, and what the recent sold prices are of other properties in the area. It’s also a good idea to ask for any information on market liquidity and economic forecasts. Crucially, you should also ask about how the platform assesses its borrowers – you’ll want to see that they conduct thorough credit and background checks.
3. Make sure your provider offers a sensible loan-to-value (LTV) on loans
A good way to assess how seriously your chosen property investment platform takes your money is to assess their typical loan-to-value (LTV) rates. For example, if a house is worth £1,000,000 and an LTV of 80% is set, then the borrower can only borrow up to £800,000. If the borrower defaults on the loan, as long as the property is sold for more than 80% of its valuation (at the time the loan was made and taking into account any legal costs, etc.) you won’t lose any money.
In short, more conservative LTVs will provide more protection in the fairly unlikely event that the property market suffers a significant decline but, again, there are no guarantees in place.
4. Make sure your provider can give you regular and transparent information
Only use an investment platform that can provide you with regular updates on how your property loans (and, if applicable, your chosen property development projects) are coming along. They should also give clear information about the repayment of investor capital. It’s perfectly reasonable to ask who will be paid first and when you’ll be getting your money back.
There are bound to be hiccups during the process of large-scale property development projects, so your chosen platform should be transparent about it and provide specific details on what they’re going to do to solve the problem.
Peer to peer lending is making investing in the highly lucrative property market more accessible to everyday investors. The key is finding the type of investment that meets your needs and a platform that will support your investment goals.
Frazer Fearnhead is CEO and co-founder of peer to peer property lending platform The House Crowd