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Wannabe landlords: borrow from the bank or the crowd?

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13/07/2015
Wannabe landlords who want to participate in the booming buy to let market in Britain can either go to the bank for a mortgage or turn to alternative financing such as peer-to-peer lending.

Both routes have their pros and cons. In this head-to-head, two experts from either side battle their case.  

The case for crowdfunding – Richard Bush, co-founder of CrowdLords

For landlords, it’s quite simple. Unlike buying a home, a buy-to-let purchase is a very rational, financially driven process. It’s all about the ROI. It’s therefore quite natural for them always be on the look out for ways to reduce their costs, add value to their properties, maximise the rental income and reduce void periods.

They should, then, be more inclined to find out what alternative finance, such as equity crowdfunding or Peer-to-Peer lending, can do to deliver that all important yield.

Alternative finance has grown in popularity for businesses because of the frustrations and restrictions imposed by the banks and these are also true in property finance. We’re all aware of the large deposits required, the tighter lending criteria and the stricter borrowing limits and this is on top of a general mistrust of traditional financial institutions.

So why is alternative finance better and in particular what are the benefits of equity crowdfunding?

In the UK, Peer-to-Peer (P2P) lending is the most popular form of alternative finance for property, but this is much the same as a traditional mortgage. Instead of borrowing from a bank you borrow from a crowd of individuals paying monthly interest and the repaying the principle at the end of the term. At the end of the day, you have to pay monthly interest from the moment you take out the loan. The amount you can borrow is similar and you still need to find the deposit, refurbishments costs and the fees upfront.

This is why Equity Crowdfunding is a good option.

Rather than borrowing the money, the landlord is essentially in a joint venture with a crowd of investors, sharing the risk and reward. Investors have an equity stake in the property equal to the proportion of the funds they provide and they make a return by simply sharing the income and capital growth generated from the property.

There are three main advantages for landlords. The first is that they are able to raise the entire amount they need for their project, including any acquisition costs and refurbishment costs. With CrowdLords, the landlord only needs to put down 5% of the total funds needed and the rest comes from the crowd. This dramatically lowers the barriers to entry, meaning that they can either purchase a larger property, or more properties, with their existing funds.

The second benefit is better cashflow. With the equity crowdfunding model you share your income with your co-owners only paying money out, when there is money coming in. This significantly reduces the impact of void periods, late payers, bigger than expected maintenance bills and all the unpredictable events that can at times have a catastrophic effect.

The final benefit is flexibility. We know from talking to landlords all over the country that their financial needs and motives vary. Some need the income and the rental yield, others are looking to build a portfolio that has capital value to enjoy in later life. The forward-looking platforms enable landlords to set the financial terms offered to investors. They decide the share of income and growth to offer Investors depending on the property, the location and their own financial priorities.

For those with a business mind and an entrepreneurial spirit, this combination of reduced initial capital, better cashflow and flexibility over the terms is a winning formula.

The traditional route – David Whittaker, managing director of Mortgages for Business

Being a landlord offers many a combination of autonomy and profitability that can rarely be matched by other equivalent investment opportunities.

Contrary to some reports, becoming a landlord is surprisingly straightforward, particularly for individuals who earn £25k+ per annum and have a 25% deposit. A record low Bank Rate and recovering economic climate mean excellent buy to let mortgage deals are available. In June the average two year fixed rate buy to let mortgage was a very competitive 3.54%.

Of course there’s no such thing as free money – but taking out a mortgage to invest in property is not reserved for those with enormous capital reserves. Given a relatively modest deposit from around £25,000, lots of research and a common sense approach, it’s possible to set up shop as a landlord and make a good profit from the very start.

Stability is another serious bonus to being a landlord. Data from Mortgages for Business’s Complex Buy to Let Index reveals that from Q1 2011 to Q1 2015 the average gross yield on standard buy to let properties has averaged 6.2%, never dipping below 5.6%. On top of that, many landlords will have seen a paper profit from rising property values too. But like all good investments, being a landlord isn’t about taking a risky gamble to make a quick buck. It’s about gaining secure and steady income over the long term.

Research from the lender Landbay illustrates that, over the 1996-2014 period, buy to let was by far the most profitable return compared to the other main asset classes. Investing £1,000 in buy to let in 1996 would have generated a return of £14,897 – many times the returns from traditional gilts or equities.

But it is the independence of being your own boss that is perhaps the greatest advantage of buy to let over something like P2P property ownership. As a landlord, you decide when to sell up with (hopefully) a healthy profit. Or indeed, you decide when to expand your portfolio and potentially profit further still.

By contrast, you cede nearly all control in a P2P property arrangement, and are often at the mercy of the majority as a result. Fine when you all agree on what your priorities are, not so good when you don’t – or when your own circumstances change.

To be clear – there’s nothing wrong with new forms of finance. Peer to peer lending even has its place in the buy to let market. Indeed, the P2P lender, Landbay, is supporting the latest Keystone BTL mortgages. But there’s a difference between P2P lending and P2P ownership. Pooling ownership of a property, as proposed by businesses such as Crowdlords, can in no way compare to the independence of being the sole landlord of a property. So, if you’re serious about investing in the property market, and you have the funds to invest, autonomous buy to let is the only game in town.

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