Bricklane - Property ISA

hardikjshah83 wrote: »

since I came across this investment option on Zoopla and started digging.

looking at their website they now own about 5 properties and have another 5 in the pipeline. they seems to be buying one property a month.

OK. There are millions of properties in the world and tens of thousands of companies. So a small portfolio of only owning five things with perhaps a few more things in the pipeline, does not seem like a very diversified way to spread your money around investment opportunities.

thinking of putting small amount on it to see how it goes!

The numbers in your signature suggest you shouldn't, unless you forgot to update your signature for the last year and now have a few hundred thousand to invest.

If you do have a few hundred thousand to invest, it wouldn't be too inappropriate to put a couple of grand into a niche investment fund with no track record, just 'to see how it goes', because we all like to have a bit of fun from time to time and losses would only be a small proportion of your overall investment portfolio.

mohawk wrote: »

I am not impressed with Bricklane which triumphantly squeaks that a wonderful return of about 8% is the first time buyer's entry onto the property ladder. Why not invest your money in better performing ( & safer) unit or investment trusts likely to produce a far higher return. An average of 15% year on year is quite possible with those, so why not put your money there and make it grow faster - perhaps twice as fast as Bricklane !

15% is not available from 'safe' unit trusts / investment trusts. That is 50-100% higher than a typical mixed asset fund delivers over the long term.

Perhaps you misunderstand the world of investments as you have only looked at a chart covering the last 3 or 5 or 8 years during which time the stock market went on a long and strong bull run and the bond markets reached their highest point in 300 years due to a combination of unprecedented quantative easing and the lowest worldwide interest rates in recorded history. Or you are looking at a funds investing in a particularly volatile industry sector or a specific global region, either of which could have a very bad time in the markets for long periods.

I have thoroughly researched this whole idea & come up with a much better idea

'thoroughly' researched it seems quite a generous interpretation ...

mohawk wrote: »

Here's a brief explanation here

I looked at the linked page on your blog:

- crowdfunding investors lend money at a fixed return of 3-4% to 100% finance a property purchase;

- renters pay market rent for as long as their tenancy lasts;

- from the moment the tenant commences paying rent, he starts to accrue a return linked to the long term return (property value growth and rental profits) which is available to the tenant whenever he leaves (which could be at any time; he does not have to remain any longer than any initial short tenancy) in the form of cashback, and will be at least 30% of what he paid in rent.

So let's do a worked example:
- Property purchased for £200k financed by crowdfunding
- Crowd lenders agree to only take 3.6% fixed interest return
- Rent set at £1k per month (£12k per year, 6% yield on property value)

Each month:
Renter pays £1000;
£300 set aside for renter's cashback at the end of the year because you need to be able to pay them out when they leave and you reckon cashback will be at least 30%;
£600 paid in interest to crowdfunders;
£100 set aside for repairs and maintenance;
£0 paid for buildings insurance because you somehow get it for free;
£0 paid for property / lettings management because you somehow get it for free;
£0 legal costs on change of tenants because you somehow get it for free;
£0 set aside for periods between tenants because there will never be more than a day's gap between tenancies, it's always 100% let out;
£0 set aside for a rogue tenant who can't /won't pay the rent, takes 6 months to evict and has caused £10k of damages, because that will never happen;
£0 corporation tax bill because the co-op didn't make any profit.

That all sounds very nice.

However the problem comes when you try to actually get the finance.

£200k property purchase incurs £1500 stamp duty. Allow another £1500 legals for the purchase conveyancing and for the initial rental agreements, and a couple of thousand on initial decoration or fixtures and fittings. So really need £205k cash to do it. Oh and you probably need a bit of free cashflow as the repairs/maintenance fund is only starting up from zero at £100pm. So call it £206k fundraising needed.

Crowdfunding websites that have a decent reach and will help you raise the cash will take a cut of all money raised, for example crowdcube.com is 7%+Vat fundraising fee. So you need to raise £225k of capital from [STRIKE]mug punters [/STRIKE]crowdsource investors for each £206k you want to invest in the venture.

The £225k fundraiser gets you a £200k property and £1k cash on the side. A slight problem is that the 3.6% interest rate on £225k is £675 a month and the operating budget above had only allowed £600. Well, we could say the repairs and maintenance fund was £25pm instead of £100pm, but that seems a bit pathetic, or perhaps we just charge the renter more.

If we charge him £1100 a month he can later get 30% cashback leaving £770 net available for costs, and we can afford the £675 interest bill and still have £95 a month for repairs and maintenance fund which is about half a percent per year of the property value. As long as all those other costs I mentioned above are all £0, and we have that initial £1k cash that we took from the crowdfunders as a cash float, the month to month cashflow is fine. Well, as long as we get the property purchase completed and a tenant in during the first month so the interest costs don't burn through the cash float straight away.

In suggesting that the cashflow will work fine, we are assuming, of course, that the renter is happy to pay £1100pm for a £200k property (knowing there should be some cashback at the end). Is £1100 per £200k of property value (6.6% annual gross yield) achievable? In much of London it wouldn't be but you would find some places around the country on that sort of yield.

Then as you mention,

the property market is almost certainly heading for total stagnation and even possibly a severe fall

So, you reckon there is no property price growth on the cards in the near future and instead there could be a crash. You are probably right- especially as we are coming out of a period where consumer credit is high relative to earnings, property prices have been pumped up to very high multiples of salaries etc, as the UK population had been getting used to a period of more than 8 years with the lowest bank base rate since records began three centuries ago.

Clearly, when we go off on our fundraising trail we must be up front about that fact that a property crash could be 50% from peak to trough, especially as property prices are not particularly low at the moment and you think they will stagnate or fall. Even if we don't mention this in our fundraising pitch, savvy investors will figure it out for themselves when they consider giving us the money.

OK, so we are asking investors to give us £225k loan which will be secured on £200k of property and a £1k cash float. They know the £200k could fall to £100k because property prices could crash. They are not investing for equity upside so would not expect to lose all that money themselves, only lending at a fixed rate of interest.

But a crowdsource investor doesn't want to be locked in for two or three decades and will want an earlier exit route, and knows their exit will be subject to you being able to refinance from another lender, possibly at the bottom of a crash.

They also know there were all kinds of costs you didn't budget for from month to month such as lettings management and insurance, and they recognise the fact that you may have periods where there is no tenant or the tenant isn't paying, or the damages caused by a tenant are not fully covered by deposit and that tenant's cashback fund, and so overall averaged across the cooperative's portfolio the cashflow could be extremely tight, which puts their interest income at risk - the coop may default on some of its interest payments.

So, as a lender of the £225k, secured on only £100-200k of property value with tight cashflow, they have given a loan of 112.5 to 225% of the value. Their only way to get their principal back is for you to borrow the £225k off someone else to pay them off (using the £100k-£200k property as security). If interest rates have risen in the market and property prices have fallen, you will find it very difficult to refinance it and simply won't be able to pay them off. If you struggle to make the monthly payments - for example due to problems with your rental income or the size of your other costs - they may demand you sell the property and pay them off.

But in such a situation, if the property has crashed in value 35-40% and is only worth £125k on the open market, and they want to sell it in a hurry at auction, they may lose 10% of that remaining value due to low bids and auctioneer fees. That leaves them with only £112.5k recovered from their £225k loan. They lost half their money.

Crowdfunding lenders who are risking losing half their money do not lend at a fixed interest rate of "3-4%" as you optimistically suggested they would. An individual crowdsourced investor finds it difficult to enforce the charge over the property because he's only one of a thousand lenders. So his security is less than a bank would have. And unlike a bank providing a buy-to-let mortgage at 75% loan to value, the crowdsourced investor is being able to provide a loan at 112% of value and for which the security might drop in value so that it becomes a 225% loan to value with a loss of half the money possible.

As such, the crowdsourced lender will not give you the loan at the 3.6%, £600-675pm level which went into the business plan. They will look at the going rates on other poorly-secured loans to property businesses and demand much more than just a low fixed rate. Either they will want the equity upside (which you were hoping to be able to give to your tenants, if there even was any over the next decade) or they will want to charge a more realistie rate. Maybe 8% would do it.

Unfortunately 8% on a £225k loan is £18k a year or £1500 a month.

Your business model doesn't have any room for that kind of interest payment because it exceeds the gross amount that you could even let the property out for, let alone paying for any operating costs of your cooperative or any repairs and maintenance, funding of void periods etc, or being able to put aside 30% cashback for a rental tenant who leaves after 12 months and has been promised that when they leave they would get a cash sum of "...AT LEAST THIRTY PER CENT OF THE RENT THEY PAID, and possibly more".

My housing co-op on the other hand would be totally unaffected by falls in property prices as the renters/tenants would still accrue the same percentage of ownership for each year they rent.

Unfortunately you are living in cloud cuckoo land because the cost of finance that must be serviced *is* totally affected by falls in property prices.

Your only way for your scheme to work is to bankroll it yourself without demanding a market return, and then you can afford to give away all the equity to the tenants. You won't find anyone else wanting to fund it on a long term basis at a low fixed interest rate.