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Warning over the lure of crowdfunded BTL schemes

Tuesday 10 May 2016

Experts have warned that new crowdfunding schemes to invest in BTL property may not be as secure or foolproof as they first appear.

Traditionally, landlords have needed a large deposit to buy a property – and this is where new crowdfunding platforms have appealed to would-be investors.

By joining forces, investors can buy in for as little as £50, and when the investment is fully funded, they will jointly own the property, sharing rental yields and benefitting as its value appreciates.

On the face of it this appears to be a win-win situation: a new financing model which uses peer-to-peer networks to enable investment according to an individual’s means.

Some services even dispense with the work of finding a suitable property by offering photos, floor-plans, valuations from chartered surveyors, title reports from solicitors, and the property’s estimated rental value.

Approach these schemes with caution

But potential investors should approach such schemes with caution as there are a number of underlying risks.

Crowdfunding sites can charge as much as 5% of the investment in fees alone, while taking a generous 25% of the rental yield to cover the costs of letting and management.

The growing popularity of the schemes does not insulate the investor against any of the risks associated with the BTL sector: an unforeseen problem with the property will still need to be addressed – using future income from rent.

Investors also need to consider their own exposure to risk if the crowdfunding company runs into financial problems itself.

Scammers are an ever-present threat, but the real issue that troubles many landlords is the loss of control.

Investors have no say in the tenants, the rent or maintenance. Crucially they have no control over how costs are calculated.

And if revenues don’t cover those costs, investors will find themselves in the unenviable position of watching powerlessly as the value of their stake diminishes.

Some sites do allow investors to sell their stakes on to a secondary market, but the Council of Mortgage Lenders has warned that getting your money out could be a ‘difficult, time consuming, complicated and risky’ process, precisely because of the way the scheme is funded.

While BTL crowdfunding schemes continue to be a very tempting proposition for some people, none of the risks of investing in property are eliminated.

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