Peer-to-peer property lending is increasingly appealing in the buy-to-let (BTL) market as changing regulations make it more difficult to start out as a BTL investor.
For many people, and for many years, property has been seen as a first-choice way to invest for the future, with short-term yields from renting it out and capital gains to be made when it comes to selling property too.
But one significant benefit – the ability to offset BTL mortgage interest against any profits made – is now being phased out, and it’s leading some property investors to look away from the traditional lending market and consider P2P property lending instead.
What is P2P property investment?
By definition, peer-to-peer lending involves two parties – the borrower and the lender, who is a ‘peer’ rather than a financial services institution or credit union.
You can become a P2P property investor with less than £1,000, by choosing a platform that allows you to offer smaller loans such as short-term bridging loans for property development projects.
There’s a balance of risk and return, but interest rates can reach into double figures on an annual basis, and as the investor you are not ultimately responsible for the running of the property, including any management fees, running repairs and tenancy void periods.
It’s not without its risks, but with some due diligence and careful consideration of the level of risk you are exposed to, P2P property lending can have big potential as part of a balanced and diverse portfolio.
Types of P2P property investment
There are a few main types of P2P property lending, one of which we’ve already mentioned above:
- Bridging loans provide finance on a short-term basis to help developers and homeowners span a short gap in the funds they have available to complete their project. It’s usually a faster way for the borrower to obtain funds and if all goes well, a faster rate of return for the lender too.
- IFISAs, or ‘Innovative Finance ISAs’, are a fairly recent introduction that extends the tax-free benefits of an ISA to P2P lending. Awareness is still low even among experienced investors, who could be missing out on low volatility and higher returns of around five percentage points more than a cash ISA.
- Pension schemes can also put funds into P2P property lending, for example via a Self Invested Personal Pension (SIPP). There are rules that may restrict your activities somewhat, as with all pension schemes, but your investment will benefit from the tax advantages of a pension too.
As always if investing via a pension scheme, or making a non-pension investment for the purposes of retirement planning, be sure to factor in the likely risk and return not only in the present, but in the last few years before you retire and start to live off the value of your investments too.
Five things to think about
When planning to invest in P2P property lending, there are a few important points to consider before you ever put any of your own money at risk.
Here are five top tips for P2P property investment to help reduce your risk and give you more confidence in your portfolio…
- Due diligence
Make sure you do your own due diligence, but also that the P2P lending platform you choose are rigorous in their research too.
Ideally you should invest through a platform that fully researches crowdfunding campaigns before allowing them to launch – and makes that information available to you to guide your investments.
This can help you to identify the best opportunities, such as those where planning permission has already been granted, and to act at a time when the market is gaining strength and value.
- Security
Is your investment secured? Your chosen platform may hold a reserve fund in order to be able to compensate investors if a deal falls through.
Alternatively, the platform may take out a second charge against the property involved in the loan, allowing you to regain lost funds by selling the property if necessary.
It’s important to remember that P2P lending is not covered by the Financial Services Compensation Scheme – so if the borrower goes bust, your money is very much at risk.
- Updates
You might not want to micromanage the projects you invest in, but it’s good to get regular updates about how well they are proceeding.
This is especially true of larger projects, where there may be more things that can go wrong or delay completion and delivery of the finished properties.
You may not be the only investor on a particular project – so make sure you also get updates about anyone else who is owed money and whether you will be paid before or after them.
- LTV ratios
Like on a conventional mortgage, the loan to value ratio (or LTV ratio) is a measure of the value of the loan as a percentage of the market value of the property.
For example, on a £100,000 property, a loan of £90,000 would have an LTV ratio of 90% and the remaining £10,000 is typically placed by the borrower as a deposit.
But for investors, the LTV ratio is a measure of how much undervalued you could sell the property and still recover your funds.
So if you are forced to offload a repossessed asset in a hurry at 80% of its value, you would break even on an 80% LTV loan, but lose 10% of the total value on a 90% LTV loan, and so on.
It’s always worth checking the LTV ratio when making an investment, as it can have a direct impact on the level of risk you face and the potential for losses.
- Start small
As mentioned above, it’s quite possible to make relatively small investments via some P2P property lending platforms.
This is a good way to test the waters of P2P property investing – allowing you to find the kinds of opportunities that work best for you.
You can then build up to larger individual investments or a diverse selection of different smaller investments that give you balance and insulation from isolated risks.
With BTL mortgage interest relief due to phase out over the coming months, it’s the perfect time to try out this innovative and very modern market, so you’re ready to place funds into the more lucrative P2P property investments that could arise over the next year or more.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
