London buy-to-let no mortgage for small investors?? Thoughts?

papakilo

I've been looking at property investments for a while and it seems the only options are:
- stock market related (which I feel are too risky for me right now),
- international (where you really don't know what is going on), or -
- you need to make a big investment in buy-to-let with mortgage risk etc.

Has anyone come across antying suitable for the smaller investor and where there is less risk?

I would have thought that there would be demand for smaller investors to invest £5k - £25k in say a central london property, bought without any mortgage so there is a lot less risk.

The rental yield should deliver c. 4% - 5% per year. This would be much more than a bank savings account and has the potential for long term capital growth as well.

I've not seen anything so looked into setting up a fund myself to see how to ensure the FSA would be happy with it, ie following FSA guidline on collective investment scheme. I work in the invesment management sector and after quite a while came to the conclusion it is complex to set something up that is "by the book" but it is certainly doable.

Before embarking down this route and setting things up, I'm trying to figure out if I missed something that is available, and to see if there is demand.

Would be great to get your thoughts, whether you are an IFA or an investor.

jimjames

So stock market is too risky but buying a property with a small stake isn't? I'm not sure I agree with your logic.

There are many other property funds out there so I guess you'd need to have some way to differentiate from them. By the time you add up all the costs I wouldn't think it would be financially viable if the 4% yield is before charges.

Thrugelmir

There are residential property funds in existance already. So not a new concept.

Linton

I cant see the attraction given the hassle and effort involved of only a 4-5% return. Is that before or after tax? Have you factored in the costs of tenants from hell, or even ones who are a little slow with the rent?

For a small/medium investor in shares the return is tax free. No hassle involved, and on average they should be able to get the same or better return.

A problem which would worry me is liquidity. Unless you are running an enormous housing empire and so can afford to retain a large cash reserve how do your small investors get their money back when they want to sell? What happens when a property value crash scare spooks them - you are targeting the risk averse market.

Sorry I'm out.

papakilo

Thanks for this.

Isn't there a market for people who want to know soecificallyvwherevthere money is being invested?
The funds are black boxes, whereas owning a small share of something you can see would at least some people greater comfort, right?

The exit would be a fixed period say 5 years, during which time your making net 4-5% plus capital gains.

Also your not having to trust an operator as you have direct legal ownership of the underlying assets, so your safe if the operator goes busy.

So my thinking is really about a service for risk averse small investors - forget the hassle for who ever is arranging it.

Annisele

I don't think you could set up an authorised collective investment scheme that only invested in one property. I'm no expert, but I think you'd fall foul of COLL 5.2.3R - I can't see investment in a single property counting as a "prudent spread of risk".

I also think you misunderstand the risks of what you're proposing. Lack of diversification means that if you get a single tenant from hell, you've got no income from the arrangement at all until you sort it out.

I consider myself a medium risk investor, but I wouldn't touch your proposal with a bargepole - it would be too risky for me. What happens if there's a dispute between the property owners? What about the tenant from hell, or the cost of repairs, or the risk that the property will fall in value? It sounds as though I'd be giving up control (versus owning the property with a mortgage), but I'd still be exposed to all of the risks of BTL plus some additional risks re the fund manager.

In addition, I can't see that you could set it up with direct legal ownership of the underlying asset. I believe you can only have four legal owners registered with the Land Registry, so you'd need your property fund to be the legal owner. (In any case, anything else would likely mean you'd pay stamp duty when you bought the shares of the property).

Linton

papakilo wrote: »

Thanks for this.

Isn't there a market for people who want to know soecificallyvwherevthere money is being invested?
The funds are black boxes, whereas owning a small share of something you can see would at least some people greater comfort, right?

The exit would be a fixed period say 5 years, during which time your making net 4-5% plus capital gains.

Also your not having to trust an operator as you have direct legal ownership of the underlying assets, so your safe if the operator goes busy.

So my thinking is really about a service for risk averse small investors - forget the hassle for who ever is arranging it.

How would the exitting investor be paid? Would you sell the house(s)? Or perhaps only allow the investor to exit if someone else bought his share?

qpop

There are private investment funds in single commercial properties, but commercial leases are 5-25 years typically, so a fair bit more security of income than a typical assured shorthold tenancy agreement (6-12 months).

As for funds being black boxes, bricks-and-mortar property funds keep lists of the properties they own and make them publicly available, take this for example (Henderson UK Property)
Their top property appears to be this.
Oh, and a 4.7% yield as well. Plus any capital growth in the fund. Plus liquidity if they want to get out (unless there is a crisis and they delay this by six months)

Thrugelmir

papakilo wrote: »

The exit would be a fixed period say 5 years, during which time your making net 4-5% plus capital gains.

Not worth the risk at this level of return. Capital gains on property ? Good days are over for a while I suspect.

We've been locking into ISA's paying 4% and above for the past few years.