I have £1,000 I want to invest in residential property.
Because I’m not buying a property myself, it looks like my option is to put my money with a peer-to-peer lender which makes loans to property developers.
Is this the only option I have or are there any alternatives?
Want a slice of buy-to-let without the headache of doing it yourself - we compare the options
Sarah Davidson, of This is Money, says: There have been several developments in the UK on this front, with a range of tech-driven start-ups launching over the past year with people exactly you in mind as customers.
To find out why, we asked the bosses of two of them. They both explain below how their investment products work and what the benefits and risks are.
Bricklane.com offers a property Isa that buys buy-to-lets with cash and provides a return based on rental income and capital appreciation.
Landbay, on the other hand, is a peer-to-peer lender that allows landlords to borrow from private investors so they can purchase buy-to-lets. Returns are generated as the landlord repays the loan with interest.
The two types of investment both give exposure to residential property in the UK but through quite different structures.
It's possible to put some peer-to-peer investments into the new innovative finance Isa, with many of these set to launch in April.
Unlike money held in a cash Isa, any funds you hold in an innovative finance Isa are not protected by the savings Financial Services Compensation Scheme meaning your capital is at risk.
If you do consider investing, make sure that you do your own research, question any suggested returns carefully and weigh up the fees that are charged, which will eat into any money that you make.
Simon Heawood, chief executive of BrickLane.com
Simon Heawood, chief executive of online Property ISA Bricklane.com, replies: The good news is that you now have a few options to invest in the housing market, whereas a few years ago you would have been out of luck.
People often like the security of investing in real bricks and mortar, and it has historically delivered strong returns - around 9.6 per cent a year through a combination of price growth and rental income.
With interest rates so low, people are increasingly attracted to residential property since it offers an income yield from rent paid by tenants - this can significantly outperform cash over time.
With so many unable to get a foot onto the housing ladder, and buy-to-let becoming less tax efficient to invest in directly, there are many interesting ways for private individuals with smaller amounts to invest in the market.
You should remember though that property prices can rise and fall, and rental income isn’t guaranteed, so as with all investing, you need to do your research and invest sensibly. Any investment platform should clearly explain the risks to you and you need to make the decision that’s right for you.
As you mentioned, there is peer-to-peer lending. Not all peer-to-peer lenders lend to property developers - some lend to buy-to-let landlords at fixed or variable rates. This can be interesting for those looking for a steady income, and the loans are property backed.
That said, it sounds like you’re more interested in investing into property, rather than lending to others doing it.
There are a few property crowdfunding platforms that have been around for a couple of years now, which allow people to invest in companies that hold properties.
Customers are able to choose which properties they invest in, which can be attractive, but tax can be high depending on your individual situation, and these platforms tend to be aimed at seasoned investors.
If you’re looking for a simple way to invest your money in the property market, then you might want to have a look at something like our residential property Isa, which launched last autumn.
It is similar to an investment Isa and offers the same tax benefits as both a cash and stocks and shares Isa.
However, rather than returns being linked to interest rates or stock performance, they come from rental income and property price changes. As an example, whilst the best cash Isas are currently offering returns of between 0.9 per cent and 1.3 per cent, our Bricklane.com property Isa is presently delivering an average return of 3.5 per cent from the rental income alone.
Property price changes on top that can increase the return further. It’s hassle-free to manage and is accessible to normal people with the option to invest from as little as £100.
Unlike crowdfunding, it can be included within a £15,240 2016/7 Isa allowance. If you find a property Isa that also uses the Real Estate Investment Trust (REIT) structure, then it will give you even greater benefits, with zero tax to pay on property price increases and rental income.
You could also invest in shares in house builders to gain exposure to residential property in the UK.
Some, like Persimmon, have performed well recently and are large businesses with long track records. You can incorporate these in stocks and shares Isas, but remember that the pricing of your shares can be volatile.
Performance of your shares can also be unaligned with movements of the underlying property market - house prices and market rents may be rising, but a house builder’s share price may fall due to any number of external factors.
If you’re not sure of the right option for you, you should seek independent financial advice.
A growing number of people want to invest in property without buying a house directly
John Goodall, chief executive of buy-to-let peer-to-peer lender Landbay, adds: Your situation sounds similar to that faced by a growing number of people, keen to reap some of the well-publicised rewards from the UK property market, but without getting directly involved with the demands of owning, renovating or renting yourself.
There are several ways you can do this, and for many investors a popular option is peer-to-peer lending. Now over a decade old, peer-to-peer lending is where one peer or multiple peers provide funds to another peer - the borrower - in return for regular interest on that loan.
These loans can be for a range of reasons: consumers in need of a personal loan, businesses seeking money to invest, and also for a range of different property activity.
As you rightly say, investing through a platform that lends to property developers, such as LendInvest is one obvious option – these loans help finance mid to large scale developments and offer returns of around 4 to 8 per cent depending on the risk you’re willing to take on.
Property development is a relatively higher risk investment than buy-to-let, there all manner of complications that could potentially derail a development project, but the returns do typically reward the higher risk.
For those after a more secure route into property-backed peer-to-peer, the buy-to-let sector is another option. A few platforms now allow investors to lend money to a diversified pool of buy-to-let mortgages lent to experienced and professional landlords.
Not only has this proven itself to be statistically the lowest risk sector in the peer-to-peer mix, but the demand for rental property is growing at pace, as the UK’s housing shortage leaves millions of people unable to buy a property outright.
This trend is supportive of the long-term growth of the sector, providing stable and sustainable returns for those with money to invest.
Landbay for example lends solely to experienced and credit-worthy landlords and as such is positioned at the conservative end of the market, offering interest of up to 4 per cent, with many layers of protection for investors’ money.
These include a reserve fund, a clean track record of zero late payments or defaults, regular and strict stress testing, a commitment to total transparency – and now full Financial Conduct Authority and HMRC approval to provide these investments within an Isa tax wrapper.
While 4 per cent is indeed lower than some of the other platforms in the market, we take this moderate risk approach in order to give investors peace of mind – to offer higher returns you have to take on more risk, which is why we do not offer loans for development, bridging or commercial purposes.
Rented properties are naturally income producing, and landlords are not short-term investors, they look for long-term yield, so Landbay investors can share in the profit from the rent generated, not from the value of the property itself.
This means investors are largely insulated against price fluctuations, unlike others that are directly linked to the equity of the property itself.
Of course, no investment is 100 per cent safe. Despite all of the protection and regulation in place there is always an outside chance that an investor will make some losses over the course of an investment’s life cycle.
But, if you are looking to diversify into the buoyant rental market, and have as little as £100 to start with, peer-to-peer for buy-to-let is proving to be a robust and rewarding ways to do so.
A handful of platforms now offer peer-to-peer investments through the new innovative finance Isa, and while the minimum investment at Landbay is higher (currently £5,000 – including Isa transfers), you will for the first time be able to benefit from this exciting asset class within the government’s tax-free wrapper.