It’s no secret that buy-to-let landlords have had a hard time in recent years, as a range of changes have made turning a profit far more difficult. In many ways, we could be seeing the end of the “easy money” era for property investors.
However as one investment avenue seems to be coming under increasing strain, so another appears to be growing in strength: that of peer-to-peer property investment. In this article we’ll look at some of the pros and cons between these two vehicles, in order to help prospective investors make more informed decisions about where to place their capital.
The bad news for BTL investors is that the Tory government is making it ever tougher to turn a profit. Firstly, there has been the introduction of the stamp duty surcharge,and next year investors also anticipate changes to mortgage tax relief. This all paints a rather bleak picture, with many residential landlords claiming that the changes will significantly affect their business.
While some plan to stop purchasing additional properties, or even sell their existing investments, others plan to play the long game, and possibly increase rents to cover their growing costs.
So far, so depressing.
But all is not lost, and any changes as significant as these are going to create opportunities for experienced investors. A smaller number of competing landlords may serve to reduce market demand – and hence property prices – making it more affordable to buy.
Additionally, landlords shifting already-tenanted properties may also make for healthy returns for those with the cash-flow to finance them.
Lastly, of course, let’s not forget that the buy-to-let market is far from uniform. Property sizes and types, not to mention renter numbers, incomes and average property prices can all impact on returns.
While many landlords openly admit that investing in the London property market is unlikely to yield the type of return they expect, there is an obvious North/South divide. Many cities in the North of England, such as Leeds and Manchester, offer significantly higher yields on average when compared to investments in the South East.
So much so, that a number of investment companies such as RW Invest now specialise only in the North, often selling to well-capitalised individuals in the South who have benefited from historical property growth.
Opportunities can still be found, therefore, and with the potential of fewer competitors these changes may even turn out to be a golden age for smart investors.
While the government seems to be making it ever more challenging for BTL investors to turn a profit, quite the opposite seems to be happening to the still-new crowdfunding marketplace.
Such peer-to-peer lenders seem to offer a surprising number of benefits. Firstly, there is no need for the investor to actually find properties to invest in; these are already provided. Secondly, with minimum investments from as little as £50 such marketplaces open up property investment to a far wider range of individuals, many priced out of standard buy-to-let opportunities.
Thirdly, and perhaps most significantly of all, is that as from next year a new Innovative Finance ISA
(IFISA) will help to keep gains in a tax-free financial wrapper.
So, should BTL investors consider moving their focus across to the new P2P marketplace?
As it turns out, while crowdfunding sites themselves are bullish about their future, it is a case of “caveat emptor”, and all may not be as rosy as it first appears.
Firstly, it is important to say that current P2P investments aren’t offered the same level of financial protection and compensation that can be gained from other opportunities. Your money really is at risk, and isn’t covered by the UK’s Financial Services Compensation Scheme.
As a result, while it is unlikely based on historical performance, there is always a risk that crowdfund investors could find themselves significantly out-of-pocket in the future.
Traditional BTL investors should appreciate that their “bricks and mortar” assets provide inherent value, making significant financial losses less likely.
Secondly, while the much-lauded IFISA sounds initially exciting, it is also worth bearing in mind that the personal tax limits have been raised significantly, meaning that ISAs no longer offer the same benefits that they once did.
Lastly, while it could be argued that there is safety in numbers, other investors may find the lack of control over their investments a serious frustration. After all, one of the true joys of standard property investment is the degree of control one has over finding, researching and renovating properties for profit; with crowdfunding most of this is taken off the table.
BTL vs P2P: What’s Best?
The obvious question after all this, is whether traditional buy-to-let investments or the trail-blazing peer-to-peer networks are “best”.
Here there is no right answer. In essence, these are two quite different tools, and deciding which should get your money really is a matter of personal preference. While P2P may be more suitable for those with less experience, or so-called “armchair investors” who don’t want to do any of the dirty work themselves, crowdfunding may indeed represent an exciting opportunity to dip your toe into the property investment market.
For more experienced investors, the greater levels of control (and,arguably, financial security) that owning properties personally brings means that the BTL market is far from debt.
Whatever vehicle you choose, the evidence suggests that there’s still plenty of life in property investment – if you’re willing to change with the times and adapt to new challenges and opportunities.