Are you a landlord selling up because of swingeing taxes? Or would you like to dabble in residential property but don’t have much savings? From property funds to peer-to-peer loans, we look at the options
Property investors are feeling the pinch as the regulatory and government changes to buy to let start to take hold.
As well as a 3% surcharge on stamp duty for second homes, landlords can no longer offset all of their mortgage interest against their profits before calculating how much tax they owe.
The reduction in relief is being phased in, so by April 2020 none of the interest will be tax-deductible.
It is also getting harder for landlords to get into the market in the first place, following the Prudential Regulation Authority introducing stricter affordability tests for borrowers.
In the wake of these changes, the number of buy-to-let mortgage approvals for house purchases dropped by 13% in 2016 and by 27% in 2017, according to data from Shawbrook Bank.
But that doesn’t mean that a landlord’s love affair with property has to end: there are several ways to invest in residential property without huge tax bills or the stress of dealing with tenants’ late-night call-outs.
One of the easiest ways to invest in homes is through peer-to-peer (P2P) lending: investors lend money to borrowers, with the cash secured against residential and commercial properties or new-build developments.
There are 11 P2P secured property lending platforms, including big names such as Landbay and Proplend – though most focus on bridging and development loans – according to research by 4thWay.
The P2P comparison site says you can invest as little as £25 with Funding Secure, which lends money against land values to develop property, while six platforms offer minimum loans of £500 or less. This means that lenders can diversify, spreading the risk across several providers.
P2P property loans are also an option for wealthier investors who want the platform to do the work for them. For instance, Lendy Wealth365 offers returns of up to 10% from an account with 365 days’ withdrawal notice, while its Wealth60 offers returns of up to 6% with 60 days’ notice. Both accounts ask for a minimum deposit of £10,000.
If you worry about the risk if the UK property market were to suffer a downturn, picking properties that offer low loan to values (LTVs) will mean your loan will be more secure. Alternatively, you can focus on properties that are more valuable than the loans themselves, making it easier to recover bad debt.
Neil Faulkner, managing director of 4thWay, explains: “Lenders in property P2P loans should spread their money across lots of loans and P2P lending platforms and to lower risks further, weight their lending towards loans to residential or commercial landlords.”
However, bear in mind that borrowers may pick P2P because they have been refused finance from banks and building societies.
“Loans do sometimes go wrong and, while you usually expect a good recovery, it can take a long time for any recoveries to be made in property loans,” Mr Faulkner adds.
Max Lehrain, chief operating officer at P2P platform Relendex, has the following advice for would-be investors.
“Join a P2P platform, but don’t put any money in. Watch what happens and get comfortable with how it works. Then maybe start with a small amount of money – you can invest from £500 on our platform – and see how it goes,” he says.
“It takes a long time to recover when property loans go wrong”
Crowdfunding differs from P2P in that you can get a stake in a property and a return on the rental income and capital growth, rather than investing in a loan secured against a property. You can invest on websites such as CrowdLords, Property Moose, Property Partner, The House Crowd and UOWN. Crowdfunding offers a great way for novice investors to dip their toe in the property sector – for instance, you can invest from as little as £1 with UOWN.
As with P2P, these investments are not protected by the Financial Services Compensation Scheme.
Innovative Finance Isas
It’s worth checking which P2P or crowdfunding platforms offer loans within Innovative Finance Isas (IF Isas). This type of Isa allows savers in this sector to benefit from tax-free interest and tax-free capital gains on their annual Isa allowance of up to £20,000 a year.
IF Isas are available from platforms including CapitalRise, DowningCrowd, HNW Lending, Kufflink, Landbay, Landlordinvest, Property Crowd and Relendex. For more information, visit Innovativefinanceisa.org.uk.
“All I need to worry about is the income generated”
Tracey Dawson (pictured above), managing director of a small electronics manufacturing firm in Leeds, has been investing via crowdfunding platform UOWN. She finds running her own company means she doesn’t have time to be a hands-on property investor.
“I’ve invested in commercial properties before and obviously I’ve invested into pensions, but this was the first attempt at investing other areas,” she says.
“It’s much simpler than buy to let. I don’t have to worry about tenants. I don’t have to worry about maintenance.
It’s all done for me. All I need to worry about is the income that’s generated.”
Another way to get a foot in the door of the housing market is to invest in property funds. You can invest small amounts of money and spread your risk across several properties – but if you want to stick to residential homes, your choice of funds is limited.
Claiming to be the first and only open-ended investment company (OEIC) in the UK investing directly in residential property, the Home Investor Fund was rebranded this summer after running for more than five years as Hearthstone UK residential property fund. It also invests in residential property through Isas, Sipps or bonds.
Cedric Bucher, Hearthstone’s chief executive, says: “Our mission is to change how the UK invests in residential property. We’re trying to give investors access to UK residential property for as little as £100 and, as a landlord, provide good-quality homes for tenants.
“With the tax changes that are trickling in between now and 2020, particularly for those who have buy-to-let properties with borrowing, being a landlord is becoming less and less attractive. Take someone who has a rental income of £1,000 a month and mortgage repayments of £600 a month and a marginal rate of tax of 40%. Their post-rental income will go from £2,900 to £1,400 a year – so down by more than half.
“Some of these investors will reconsider whether that is a good investment. It will be less profitable, plus there is all the hassle of running the property,” he adds.
Another option is to invest in a Real Estate Investment Trust (REIT), where investors pool their money to invest in property.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says: “REITs benefit from being closed-ended, which means fund managers do not have to sell the investments during tough times, and this is particularly suitable for investing in less liquid asset classes such as property.”
Gev Lynott, chief executive of Mansfield Building Society, agrees: “If you are planning to go into property, I would be thinking good-quality university towns feel like the place to be,” says. “If you had a REIT that was doing this and was going to cherry-pick Manchester, Leeds or Glasgow to invest in, I think it could do pretty well.”
The Investment Association’s UK Direct Property sector includes The PRS REIT, which acquires brand-new homes for the private rented sector. Launched in May 2017, it focuses for the most part on family homes for rent in key towns and cities in England excluding London. Over the year to 30 September 2018, the company’s share price total return was 4.72% – £1,000 invested would now be worth £1,047.20.
Meanwhile, online platform Bricklane.com offers investments in residential buy to let in London, Leeds, Manchester and Birmingham. Its portfolio can be accessed through Isas and Sipps, and it also has REIT status. Its Regional Capitals fund has returned 15.54% since its launch in September 2016, while its London fund has returned 10.10% since it launched in July 2017.
“A lot of my peers are scornful about taking in a lodger”
Simon Heawood, chief executive of Bricklane.com, says: “We are finding that ex- and existing landlords are using the platform as an alternative to buy to let, often with a combination of Isas and pensions (Sipps) or Isas and standard accounts. They are investing, on average, around £50,000. Meanwhile, first-home savers are investing in Isas, typically saving around £3,000.”
However, property funds and P2P/crowdfunding are not without risk – if the housing market were to crash, it would affect the underlying capital of properties in investors’ portfolios. There are also fees to consider – for example, The PRS REIT’s annual management charge is 1.44%.
Take in lodgers
“If you are relatively wealthy, you probably have a decent-sized property and that in itself is an investment in the UK property market,” adds Mr Lynott.
So if you are property rich but cash poor, then you could treat your home as an investment vehicle and take in a lodger. Under the government’s Rent a Room Scheme, you can earn up to a £7,500 a year tax-free from letting out furnished accommodation in your home (see box above).
For more information on how it works, please visit Gov.uk/rent-room-in-your-home.
“The financial freedom has enriched my life”
Hazel Durbridge (pictured above), 59, from Luton, lives with three lodgers, renting out each room for £400 a month. She has been renting out rooms for more than 10 years and finds lodgers through flatshare site SpareRooms.co.uk.
Her advice for a stress-free lodger-landlord relationship is not to get emotionally involved.
“They are not your mates, so don’t confide in them. Keep a professional distance, but that doesn’t mean I don’t listen to them when they are upset,” she says.
“Younger lodgers can start treating it like home and you like their mum. But they move on quicker, so there is less chance to get irritated. I try to keep a varied age and gender dynamic.
“A lot of my peers look down their noses at taking in a lodger, but the financial freedom has enriched my life.”