By Simon Sinclair on 31st October 2018
CapitalStackers' Simon Sinclair makes the case for property backed P2P lending over buy-to-let and equities.
It’s nearly 18 months since the gurus at Motley Fool sounded the death knell for Buy-To-Let, calling it an “expensive distraction”, and pointed investors once more to the stock market – which they avowed was “alive and kicking”.
Evidence since would appear to suggest this was absolutely right at the time.
Buy to let investors have certainly endured a miserable time recently. However, not even the sunniest optimist would suggest the stock market is a lively option right now. Granted, it (the FTSE 100) rose by 8.3 per cent in the year following the article, but it has since dropped by 10.7 per cent.
So some canny investors might be stepping back and wondering if there is a third way.
After all, there are good reasons why we British have traditionally invested in property. And yet the FTSE also has very sound reasons to commend it.
But for those who want double digit returns without the bumpy stock market ride, there is a way to achieve the benefits of both property investing and stock market investing in one, and reduce the drawbacks of both.
Secured on property, but with more liquidity than buying bricks and mortar – and less volatile than stocks and shares – it consistently brings higher returns than Buy-To-Let, without the overheads, management and conveyancing fees, refurbishment and maintenance costs and stamp duty.
Motley Fool suggests that in every respect other than the ability to borrow to invest, the stock market beats Buy-to-Let. And it surely does.
However, loan-based property crowdfunding has many of the advantages listed too. Investing in property developments by lending to the developers can bring you highly attractive, risk-weighted returns in the time it takes to build a row of houses. Investors have made annualised returns of between 8.5 per cent and 22.5 per cent – over loan periods ranging from 8 to 36 months (but typically 15 months) - all within a sensible Loan-to-Value range of well below 50 per cent and never more than 75 per cent.
Like stocks and shares, you don’t have to have saved or borrowed huge sums to get started you can participate in a building development scheme from just £5000.
And whilst your loan investment is as solid as the houses being built, it’s also more liquid. You can invest in a loan-based scheme almost as quickly as you can buy shares (with the assurance that the due diligence has already been done for you) and if you want to free up your cash, you can usually sell part or all of your investment on the secondary market.
Although investing in Buy-To-Let is verboten for pension schemes, if you have a SSAS (or access to one) loan-based property crowdfunding gives you a route to invest in the same asset class and take your gains free of tax.
But there’s one important advantage that lending has over BTL and the Stock Market, and it’s this: when you buy property or shares, you take the equity risk. If they drop in value, your capital gets burnt. There’s no firewall, no cushion, no contingency.
With BTL, your cash is in very few baskets (unless you’re lucky enough to have a very large portfolio) and you take 100 pence in the pound risk for a comparatively low return.
However, with loan-based crowdfunding on residential development where risk is layered, even the highest risk layer is cushioned by the developer’s own equity and profit, and you get to choose yourself the level of risk you want to take and the corresponding rate of return.
So you’re taking a maximum risk of 75 pence in the pound for a return that’s many multiples of what Buy-To-Let brings.
All of which points to a very healthy alternative to both BTL and the markets. As Warren Buffet once said, “If you can’t invest in the stock market for ten years, don’t invest in it for ten minutes”, and of course, it’s almost impossible to make any money out of rental properties in the short term simply because of the costs of acquisition.
But if you can make double digit returns in as long as it takes the developer to finish a building, why limit your choices to the uphill slog of BTL or the rollercoaster ride of equities?
Join AltFi for its third annual Alternative Income Forum, exploring closed-ended funds (investment trusts) specialising in generating an income using alternative assets such as specialist finance, P2P lending, direct lending, asset leasing and more. Hear from the leading investors and fund managers in this rapidly growing market.