Some recent changes are already hitting landlords hard, others will soon. Here we look at the available options in what for many buy to let investors are troubling times.
Impressions aren’t everything. Investors are now beginning to look way beyond the wealthy, gold-plated streets of London and into more lucrative areas of the country.
The latest data on buy-to-let returns, from lender HSBC shows cities offering the greatest yields (rental income measured against property cost) include Southampton, Blackpool, Nottingham and Hull with many private landlords in these areas owning at least 1 in 4 properties.
Taking a moment of pride – Manchester falls into the top 5 cities offering the greatest yield with a return of 7.98%. That’s number TWO on the list!
So why are these cities more attractive to landlords you ask?
The answer; although London properties offer prosperous returns due to high rental income, the original investment near extinguishes the return. High house prices in the big city crush the yield and limit the return. Therefore, investments into the top yielding locations are much more appealing to landlords thanks to healthier returns and overall more durable investments.
So it certainly pays to do your research, and here at The House Crowd, we’ve done just that from our very first investment. Visit our Why Join? section for more information on the benefits of property investment with The House Crowd.
Crowdfunding for property is becoming the largest industry in terms of committed capital, according to an article on Crowdsourcing.org.
In the US, a recent investment by Canaan Partners of a whopping $9 million to Realty Mogul illustrates this clearly. Hrach Simonian who is a principal at Canaan and sits on Realty Mogulâ€™s board told what he see are the key things VCâ€™s see when making property investments via crowdfunding:
- Technology is part of the solution, but itâ€™s not the whole solution. You need to attract both sides of the marketplace, the sponsorsâ€¦ and the investors.
- Is the market that a startup is in big enough, and is the timing right?
Simonian acknowledged that the real estate market is worth around $11 trillion and that niche crowdfunding platforms (which is what we believe The House Crowd is) are more advantageous over general ones, and with so many VCâ€™s making investments in property via crowdfunding, itâ€™s great news for the industry across the world.
â€¦and thank you for our present â€“ a predicted 11% profit for the next decade according to a recent report.
The findings from the report published in an article by The Guardian identified that with average annual returns of 16.3% (Â£13,000 profit) on each investment of Â£1,000 since buy-to-let mortgages were launched in1996, landlords have earned more than they would have done with every other type of investment. These are clearly superb returns.
The report has been timed to coincide with the new affordability rules requiring lenders to carry out detailed checks on potential mortgagee spending and ability to pay if interest rates go up, but buy-to-let investors will be exempt from these rules.
Landlords take one in seven mortgages, and since 1996, lenders have granted 1.5m mortgages worth Â£174bn to buy-to-let investors. You can read the full article here: http://www.theguardian.com/business/2014/apr/26/returns-for-buy-to-let-landlords-dwarf-other-investments
Following on from the reports in the press last week about Chris and Denise Tudor-Whelan, I have coincidentally met five separate people recently who have been ruined by the banks for no good reason.
These people once had very successful solid property businesses â€“ all of them worth tens of millions and all of them keeping up payments on the loans they had secured against the properties. Â And yet these people were all destroyed by the small print in their loan documents; three of them being made bankrupt and two still fighting to avoid it.
What most people do not know is that the small print in their mortgage documents allows the banks to call in the loans if the borrower breaches the â€œLoan To Value Covenantsâ€.
Essentially, what this means is the banks can have your property portfolio valued periodically by a surveyor (of their choosing) and if that surveyor decides the value has dropped below a certain threshold the bank can call in the loan immediately or massively increase the interest rate because of the perceived extra risk, thus making the investment unsustainable. They are allowed to do this even if you have never missed a payment.
There is little doubt in my mind, after speaking with these people that some if not all the banks have actively pursued a policy of using this small print to destroy property investment businesses and seize their assets at a vastly reduced level.
Yes itâ€™s immoral, unethical and corrupt, but what can be done about it? There is certainly a groundswell of public opinion against the bankers. And the internet abounds with the self proclaimed â€œfree men movementâ€ seeking to remove themselves from the shackles of HMRC and the â€œbankstersâ€. They have some interesting arguments and I would love for them to be successful. Unfortunately the whole system is stacked against them so it is incredibly unlikely.
To my mind the best solution is to avoid using banks wherever you can. Give them as little power over your life as possible. Its why we set up The House Crowd so you have the choice of dealing with an ethical, transparent and fair organisation that will also give you a much better return on your money.
Read Cartmel Butlers Report to the Parliamentary Select Committee on how banks sell on the benefit of your mortgages to privately owned offshore companies but then seek to reclaim the debt from you and repossess your property (even though you no longer owe them the money).
I have been reading quite a few forecasts of the property market of late. As usual, I regard these reports with a healthy degree of scepticism as nobody really knows what the future holds, however much of an expert they like to portray themselves. Â And clearly some of them have their own agenda to promote.
Money Week, for example, has always been extremely pessimistic about property investment as a vehicle to build wealth â€“ as anyone who has read their panic inducing ads will know.
Could this possibly be because a) they donâ€™t understand it or b) they want to sell you their â€œSpecial Reportsâ€ on Gold, Oil, Timbuktu Stocks (or whatever) so you can learn about the imminent disaster about to afflict the whole worldâ€¦ apart from, of course, those with the inside scoop.
I used to subscribe to Money Week â€“ it has much worth reading – but the continual drip drip of articles designed largely to create a sense of fear and panic (and sell Special Reports) was, in the end, just too much. I had to stop before I slashed my wrists. One thing I do remember though before cancelling my subscription 3 or 4 years ago was its editor, Merryn Somerset-Webb, writing about how financially stupid it was for us English to own our own homes. Apparently she had just sold her house in Battersea and was going to rent from then on. Hummmâ€¦ Wonder how she feels about that now.Â Not so smug, I wager.
Probably the two most reliable property forecasts I have read are Savills where you can see likely growth region by region:
and The Centre For Business and Economics Research which reports: â€a typical house in the UK is expected to cost Â£227,000 in 2014, surpassing the 2007 pre-crisis peak for the first timeâ€¦ By 2018, we expect a typical UK home will cost Â£267,000, as house prices rise by 4.6% over that year. In 2018, we predict UK house prices will be 20.4% higher than this year.â€
In short both forecast that growth in areas outside London and its environs is expected to be steady and moderate (between 2-5% a year on average) over the next 5 years. That, to me, seems about right.
As those of you who have attended our investor evenings know from my talks house prices are set to rise faster than rents and, as prices rise, yields will fall. At The House Crowd we have had a good run at buying properties at rock bottom prices but it is becoming tougher to find the deals. Rather than sitting round moaning about â€˜Who Moved My Cheeseâ€ (Google it if you donâ€™t know what Iâ€™m on about) we have to adapt to changing market conditions. We have been discussing this and have several potential strategies to accommodate changes in the market. Â We will be developing these in 2014 and will, of course, keep you informed.
We are pleased to report that we recently passed the Â£2M investment point, proving the popularity of our investment model among investors.Â This represents a significant milestone for us as we created an entirely new way of investing in property and made it accessible to small investors.
This ability to invest as little as Â£1000 and gain greater returns than most savings accounts and pensions (not tom mention being better than the returns most private landlords get) has been central to take-up among investors.Â The focus on cash flow rather than speculating on capital growth has seen us concentrate on purchasing traditional housing stock in areas of high rental demand in Manchester.
In the last first 18 months,of trading we have purchased 31 properties, predominantly two bed terraces, and we have offers on a further two houses.
Frazer Fearnhead, founder of the company, said:
â€œI am very pleased with the progress so far. The company is growing steadily, which is especially pleasing when you consider investors had no reference point before for a company like this.
We are happy they have seen the validity of this as an investment vehicle, and to be repaying their trust in us. It is a testament to what we do that many of our investors are now investing in every project we do and bringing in friends and family.
The only problem is that we are now getting oversubscribed very quickly for each project, and are sometimes having to return peopleâ€™s money. But as problems go, itâ€™s a good one to have.â€
â€œWe generally need around Â£63,000 to purchase and refurbish a property,â€ said Mr Fearnhead. “It used to take us 10-14 days to raise that amount each time, but now it is taking just a few days.Â Â In fact, the last project took just four hours to raise Â£70,000.â€
According to recent reports in the press, annuity rates are at an all time low. In fact they are so low, you would have to live to 90 to get value for money. And low interest rates and rising life expectancy are pushing rates down even further.
The BBC reported that a man aged 65 living with Â£30,000 to invest in an annuity would receive Â£1,719 a year gross for their rest of his life. Put another way, after 17 and a half years the original will have been paid back, so if he had died before then he would have lost out financially.
Compare that with The House Crowd where you would get Â£2,250 for the rest of your life (with our income only product). Thatâ€™s a whopping 30% more PLUS you still have your original Â£30,000 capital which can be accessed when you like or passed on to your heirs (unlike with an annuity which will stay with the insurance company).
And yet, amazingly, pension companies promote themselves as being low risk. I wholeheartedly agree with former Downing Street pensions adviser Ros Altmann who stated that pensioners are not properly warned about the risks involved in buying annuities. She added Â â€˜If you buy a financial product that can lose more than three quarters of your money, it would usually be considered â€œhigh riskâ€ â€“ and those selling it to you would surely have to give you a proper risk warning.â€™
â€˜Pensioners take â€˜the biggest gambleâ€™ of their lives when they buy an annuity to provide for their retirement. They would have to live until the age of 90 before their annuity became â€˜good value’, warned Altmann.
Where we disagree with her is when she said:Â ‘Most pensioners, have little option but to buy an annuity if they want a guaranteed income in retirement, will lose much of their nest egg if they die young, become ill or if inflation risesâ€¦’ We know people do have an option, but she clearly hasnâ€™t heard about The House Crowd.
It is worth bearing in mind that, despite the property market being in the doldrums for the last 5 years, property investment as with all other markets, goes in cycles.
If you think of the property investment cycle as seasons in the year, we have been in winter for the last few years.Â But the daffodils are starting to bloom and it looks like we may now be in spring – at least in terms of property investment. It may still be chilly, but itâ€™s definitely getting warmer.
Pent up demand from first time buyers, low interest rates on savings and the banking crisis in Cyprus mean more people are turning to property as a safe haven. And this is particularly true of the British property market.
Britain is one of the most established property markets in the world, especially in terms of property investment financing. It is very different in terms of property supply and demand from other countries such as USA, Cyprus, Bulgaria and Dubai where the property prices were inflated because of demand caused by the perceived profits to be made (greed) and the sudden availability of easier borrowing rather than actual demand for accommodation to live in.
The UK market is very different.Â I do not think there is any doubt more housing is required for the UK population. Without boring you with stats, for well over a decade, every survey I’ve seen has reported there is a massive shortfall in the amount of housing required to keep up with demand. Â Further, the rate at which new houses are being built falls far, far short of predicted requirements. So the gap is widening every year.
It is interesting to note that every time The House Crowd buys a property â€“ typically for about Â£50,000 – the rebuild costs for insurance purposes are upwards of Â£80,000 and often closer to Â£120,000. What that tells me is that if the cost of building new property is considerably more than existing stock (land values arenâ€™t even taken into account in the example above).Â Common sense suggests that few people will buy a new build property, when they can get a similar sized property for half the amount.Â It is equally clear that developers arenâ€™t going to build property unless they believe people will buy what they have to sell. And just to reiterate it: there is a shortage of housing which increases demand for available property.
Itâ€™s a complex relationship and there are differing viewpoints on how it works, but I believe that fairly soon builders will start building again in earnest. Once they start doing so,Â the price of old stock will be pulled up by the price of new builds as sellers realize they can achieve higher selling prices whilst still pricing their property competitively against new builds.
There are tentative signs that the property market is already beginning to warm up – you may well have seen the news headlines about average property prices now increasing at Â£25 a day. One factor for this is new investors putting their money into property as they are tired of the woeful returns provided by the banks and pension companies. We have noticed buy to let lending is becoming more readily accessible in the last 6 months.
But that is nothing compared to what will happen next year when the new government incentives kick in, giving buyers the ability to get on the housing ladder without raising a 20% deposit.
One thing I have learned throughout my time in property is not so much the price of a property but the affordability factor that is the biggest influence.Â Peopleâ€™s income, the deposit required, the ratio income to borrowing permitted and interest rates all play a much bigger role than the actual price tag.
The government incentives coupled with low interest rates will have a massive affect and greatly increase the demand for property pushing prices higher (although salary levels will keep the increase in check to a degree)
That may be good bad or dangerous depending on your point of view. Some argue that it will create another bubble – and they may well be right.Â But in terms of achieving capital growth over a relatively short space of time (say the next 5 years), I believe 2013 will prove to be the ideal time to invest into property.Â So get your sun cream and your sunglasses out.Â A bright hot summer for property investment is on its wayâ€¦ Shame we canâ€™t say the same for the British weather.
The Financial Services Authority (FSA) has for the first time approved a crowdfunding website facilitating direct investment in small businesses. It means investors using the website, Crowdcube, will now be able to claim compensation from the Financial Services Compensation Scheme and access the Financial Ombudsman Service if they have a complaint.
The opinion here at The House Crowd is that itâ€™s good to see a regulator starting to approve dynamic forms of financing like crowdfunding. As demonstrated by our unique business model, crowdfunding can provide great returns for all, in a safe, transparent way.
Currently, as The House Crowd doesnâ€™t fall under the definition of either a CIS (Collective Investment Schemes) or OEIC (Open Ended Investment Companies), we do not require the FSAâ€™s authorisation to operate.Â However, even though we are not FSA regulated, we do everything we can to ensure that all our dealings are as transparent as possible and that investors are made fully aware of the risks as well as the rewards in any investment. We also ensure your money is protected as far as possible – you never pay money directly to us, all investment monies are paid to a solicitorâ€™s client account and held there until the property is purchased and your shares are issued.
The House Crowd is a brand new concept in property investment which allows people to invest small amounts via crowdfunding (for more information on the process, visit www.http://thehousecrowd.com/thehousecrowd//how-it-works/). We are committed to breathing life into empty, rundown properties whilst giving investors great returns on their investments (for more information about us, visit www.http://thehousecrowd.com/thehousecrowd//about/our-manifesto/). If youâ€™ve read enough and want to invest now, visit www.http://thehousecrowd.com/thehousecrowd//invest-in-property/).