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Peer-to-peer lending compared to property crowdfunding for property investment purposes

Updated on December 31, 2014
Are traditional buy-to-let mortgages still the best way to acquire investment property?
Are traditional buy-to-let mortgages still the best way to acquire investment property?

Is It bye bye buy-to-let mortgages?

Hitherto, becoming a buy-to-let landlord has usually involved finding and taking out a traditional buy-to-let mortgage with a bank or specialist lender but, recently, two relatively new options have emerged, Peer-to-Peer loans, (P2PL), and Property Crowdfunding.

With buy-to-let mortgages becoming more difficult to procure, rates steadily rising and deposit requirements increasing, these new options are well worth considering for investors at all levels.

Peer-to-Peer (P2P), Loans Explained

Peer-to-peer loans are usually arranged via an online website platform that holds details of those wishing to lend money and those wishing to borrow and matches the various parties requirements together so that, in appropriate cases a deal may be struck.

One very interesting aspect of this development is that it completely cuts out those traditional lenders, the banks!

The lending/borrowing process is usually much quicker than traditional loans and, without the banks grabbing a large slice of the action, the rates available to both sides are more attractive.

Peer-to-peer loans are often unsecured whilst others are. There are, of course, obvious risks for the lender if the loan is unsecured, as with any other unsecured loan – if the borrower defaults and becomes bankrupt or insolvent then any outstanding debt is likely to be lost.

Attractive Rates on Offer – But Don’t Ignore the Risks

The main benefit associated with P2P lending for a lender is that there are very good rates of return on offer, especially if you are willing to have your cash tied up for longer periods, the best returns being available on investment of 5 years duration and longer.

These rates easily outweigh those available in normal savings accounts although the risk element should be clearly remembered – bank savings accounts are, to all intents and purposes, safe, whereas there are varying degrees of risk associated with your cash when it is deposited with P2P lending platforms.

Peer-to-peer lending in the UK is regulated by FCA since April 2014

In April 2014 the activities of P2P Lenders in the UK became subject to regulation by the Financial Conduct Authority, (FCA), and sanctions can be applied in cases of misconduct. It should be remembered though that this is not a guarantee that you would be reimbursed in the event of a problem occurring.

To provide this kind of reassurance, many P2P Lenders offer schemes that will provide some level of protection for lenders in the event of a default, or other problem, occurring.

How Does the Taxman View Peer-to-Peer Lending?

He loves it, of course. Please bear in mind that any income that you earn from P2P lending are subject to income tax at the standard UK rates and you should also bear in mind that, if you did suffer a loss due to a default, you would not be able to claim that loss against tax.

A landlord on the highest rates fo tax could therefore lose 45% of the rental revenue which has to be considered carefully, alongside the costs of borrowing money and maintaining a property.


How does Property Crowdfunding compare to P2P as a vehicle for investing in property?

Property crowdfunding, unlike peer-to-peer lending, is a way of purchasing equity and sharing ownership of property with other crowd investors.

Property crowdfunding is, usually, an opportunity for investors to pool their funds with other investors in order to purchase property. The property is let and managed by an asset management company who deal with all aspects of running it, finding tenants, maintenance and other issues that will be familiar to anyone who has been, or is, a private landlord.

The person making the property crowdfunding investment would then receive a regular income derived from the rental income on the property and a share of any profits made when the property is eventually sold.

Both P2P and property crowdfunding enable the investor to benefit from diversification, i.e. spreading your investment across multiple schemes, which guards against the risks involved if anything went seriously wrong.

If spreading your risk across several different lending or crowdfunding platforms it would be worth checking that they are all operating under the FCA regulations.

Understanding unsecured debt compared to ownership

It should be understood that, with peer-to-peer lending property investments, there is no actual ownership whereas there is with equity crowdfunding.

This effectively means that, as an investor, you own a number of shares in a company that, in turn, owns the actual brick and mortar property assets concerned.

When you make an investment, or many investments, and jointly own income-producing assets by way of a property crowdfunding investment, your financial returns consist of not just rental income but also offers the potential for capital appreciation when the property assets are sold.

Equity crowdfunding platforms are obliged to build and operate viable businesses and have the consumer watchdog regularly checking up on their business processes.

Property crowdfunding platforms have an additional obligation to make sure that their investments are appropriate for the investor concerned and they must also ensure that investors fully understand the risks that are involved when making an investment.

It goes without saying however, despite the regulation provided by the FCA, that investors should also conduct their own due diligence concerning investments that they are interested in pursuing.

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