I recently participated in a panel on how to be a ‘Savvy Investor’ with a core topic of conversation being Alternative Investing.
What is it? It is investing in non-regulated areas, which means they aren’t fully regulated by the FCA (Financial Conduct Authority). This captures a lot of property and property-related investing, such as peer-to-peer lending for property activities. By way of example, this can be lending to a specific developer in the form of a mini bond, (non-tradable on an Exchange) or it can be investing via a Crowdfunding Platform, a regulated ‘website’ that facilitates this process.
Unfamiliar with peer-to-peer lending and crowdfunding?
This is a relatively new sector in the market, under ten years’ old and it is an interesting time to be investing this way.
On the one hand it is ‘democratising’ the investment process, it offers property investing in bite-size chunks, with lower threshold entry levels for investment and easy access. Because of all of these things, it is starting to become a more popular way of investing in property and more mainstream, providing serious competition to mainstream bank lenders.
It has been given more of a cloak of legitimacy since the launch of IFISAs in 2016 (Innovative Financial ISAs which allow property investing as part of the tax-free wrapper).
But we mustn’t forget there are risks associated with these types of investments. There are no guarantees so everyone has to weigh up their own situation and risk profile. And make sure they are not over-stretching themselves financially.
Why might entrepreneurs invest in property via a crowdfunding platform?
Some landlords and property investors are seeking ways of continuing their property businesses in a way that will give some reprieve from the landlord red tape and tax that has become burdensome in the UK.
Investors can be attracted because it is a way of diversifying their activity, getting exposure to a number of different investment categories; either different geographies, or different types of property, for example commercial vs residential property, or the opportunity to work with a developer they might otherwise not be able to.
They can also do this in a measured way, in bite sized chunks. Some investments start at £5,000 or £10,000, some lower, particularly if part of an IFISA, where entry levels can be £1,000. Investing via an IFISA, (Innovative Finance Isas) can be tax-efficient, when used as part of a personal Isa allowance, so returns can be tax free for UK residents.
What are the upsides of Crowdfunding or investing via a property mini bond?
The returns on offer can be inflation-busting and much higher than other forms of investing. They are not always correlated with economic returns, so help spread risk during different economic cycles.
They also usually offer defined timeframes (although there are no guarantees) so this can help with planning.
Investing via a Crowdfunding website or platform can make the process quick, easy and accessible. Progress can usually be checked through a console. Many Crowdfunding platforms also do a level of due diligence which some investors like, but it is important to check what level and type of due diligence they do, so you are not lulled into a false sense of security.
What to remember when investing via Crowdfunding or developer mini bonds?
These types of investments aren’t guaranteed so it is important to check on the type of security offered for if things don’t work out as expected. Is it a registered charge on the property or land, or assets?
And how is this set up, via an independent Security Trustee holding and administering it on behalf of investors or something else?
What type of investing is being made? Are you seeking a share of equity, so that you get the upside and downside risk of a development project through shares in a company set up for a particular development?
Or lending money to a developer for a fixed return, over a fixed timeframe and the capital returned at the end of the term?
It is important to note that alternative investing provides an alternative way for entrepreneur investors to get exposure to all that property can offer, but this way of investing is not guaranteed. Capital is at risk and returns are projected, not guaranteed (or shouldn’t be claimed to be). These investments are also not very liquid, should you wish to cash in early, or redeem an investment. This is why many of these types of investments, whilst being accessible, tend to be appropriate for individuals with a certain asset base or income, or who aren’t investing too much of their money in any one of these investment types.
If you would like to talk then please e-mail firstname.lastname@example.org with a telephone number to arrange a conversation.
I work with time-strapped Expats and Entrepreneurs who don’t have the time, local presence or have gaps in their know-how to build property portfolios in the right way for them. (Or who are simply stuck with little progress). This means they can carry on their day-to-day lives without spending disproportionate time getting sucked into investing.
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