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Should you mix property with exotic investment schemes?

crowdfunding in property

Can you see cracks appearing in an alternative investment scheme?

There are a number of investment schemes in property now that is starting to cause confusion and it is evident that the complicated nature if some of the schemes can veer towards the exotic investment category which, in our opinion, requires specialist and advanced knowledge.

It’s quite clear that some of the investors in the failed schemes should never have got involved and it is worrying if they received any independent advice before parting with their cash.

For example, according to a recent article on Landlordzone, property crowdfunding is a huge risk to investors, consumer watchdogs have warned. For those that are new to the concept, crowdfunding in any sphere is when a group of unrelated individuals come together and pool their monies to support a scheme. It can support and fund a wide range of industries and start ups including property, music, online projects, apps and so on. The list is endless and that’s the beauty about it.

How a downturn might affect crowdfunding is yet to be seen… the risk is someone on a tight budget could lose more than they expected.”                                                         CML Spokesperson

When it comes to property, the basic premise is where individuals becomes shareholders of a special purpose vehicle (SPV) to buy a house outright, usually without the need of any further specialist funding. In this way, each person owns a portion of the house and gets a portion of the profits if and when there is a sale. In some arrangements, the shareholders can benefit from the rental income should there be any.

However, according to the article, “Just a few days after the Financial Conduct Authority (FCA) warned crowdfunding was leading unsophisticated investors to lose their money; the Council of Mortgage Lenders (CML) stepped in to warn property people to be careful about crowdfunding investments.”

This isn’t the most alarming of news to us and the sentence makes clear that some investors have already lost money in some crowdfunding schemes. If any individual is a shareholder in a company, then they will feel any losses that the company may occur. If the SPV fails to sell or is sold below the initial investment, then the shareholders will be out of pocket.

Should crowdfunding property schemes be stopped?

It should be noted that we think that crowdfunding is a really interesting idea and one that should be welcome in the investment market. It does allow those with smaller amounts of cash to purchase bite-size pieces of investment, but very much in accordance with the CML findings, there needs to be tougher regulation in an industry that has grown by 175% to £1.3bln in less than a year.

The most important aspect is mentioned in that property investments can go up as well as down and are these individual investors being clearly told of this or is the marketing gloss just too good? Just to be clear, we are not negating any schemes in particular. We just think that some of these types of investment schemes require rigorous inspection and those without the technical knowhow should not be getting involved. It is the responsibility of the individual investor, but the onus is on the FCA and CML to ensure that these types of schemes are left to specialist investment companies and to ensure their is recourse for action should there be any underhand tactics to attract investment from regular BTL’ers. In short, there needs to be better regulation in this investment domain.

Staying on the theme of investment schemes, a well renowned investment company that offers a trademarked ‘secure exit strategy’ on it’s investments is starting to see more and more disgruntled investors voice their anger and frustration. We can’t name these scheme or the company, but again, the exotic nature of this investment scheme is a cause for concern and in our opinion, companies should be wary of promoting schemes that require much more refined levels of due diligence and technical knowledge. It is inevitable that investors in such schemes will cry wolf when there are speed bumps along the way.

Should vanilla type investments be exempt from regulation?

On a final point, coming back to something more in the vanilla: we have seen a live cycle of a JV refurb property in Bolton that just isn’t going to work. We were refurbishing a property on the same street, opposite the road and by coincidence, our slight refurbishment was going on at the same time as the builders on the other side of the road. We know that they had purchased the property for £35,000 and have recently listed it online for £65,000. We know the ceiling prices for houses in that street is around the £55k on a sunny day. The skin in this scheme will be around £10k if they can achieve £55k but the problem here is that property on this street just doesn’t shift! It’s quite stunning to see that this company managed to get a JV partner on a 2 bed terrace property that will be lucky to sell for anything beyond £50,000. The JV scheme in this company is offered by a company that has changed it’s name so many times in the last few years. We get emails from them all the time to do JV refurbishments with them on two up, two down terraces in the North of England and Yorkshire as have some of our clients.

As for us, admittedly it’s one of our poorer purchases, but the rental yields are at over 12% and we have had good long term tenants until recently. The thing to stress here is that we made the call to buy and it doesn’t affect others when there are void periods. Still no excuse for buying a dog though!

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