Lettings expert David Lawrenson has spoken out against the fashion for investing in residential property via crowdsourcing and has instead urged people to try the much more established route of becoming a traditional landlord.
In his latest Letting Focus newsletter he says that many who believe they cannot directly afford to purchase a buy to let property are instead tempted into investing in buy to let schemes that crowdsource' or crowdfund' - advertising online via specialist investment platforms which allow multiple individuals to invest small sums into projects.
Crowdfunding takes the combined power of peer-to-peer financing, mixes it up with buy to let and is supposed to allow anyone with modest means access to the housing market and the joys of being a landlord, without ever needing to worry about finding tenants, voids or fixing a boiler that's just conked out explains Lawrenson.
However, he says this approach has significant risks.
Firstly, he says collective funding of this kind means any individual investor, even one putting in a sum which to them may be very substantial, has not control over what is done with it and no stake' in the investment - so no say over who the tenants are, how the property is managed or how costs are worked out.
Secondly, Lawrenson says those who organise the crowdfunding tend to keep for themselves the right to borrow against the property and if that happens you will see the value of your own share fall rather than increase. And you won't be able to do a thing about it, at least until, or if, you are allowed to vote on it.
Thirdly, although the practical costs of running a buy to let are rarely discussed in crowdfunding pitches to would-be investors, there will be charges to be paid for the management and maintenance of any property purchased this way. Most funds charge a five per cent up front fee and a profit share of around 25 per cent. Others we have seen want 15 per cent of the gross or net rents plus 15 per sent of any capital gain. Ouch! says Lawrenson.
Finally, he says investors trying to get their money out will not find it easy. If you own a directly held property, you can always sell it as long as the price is right. You retain control. But with a crowdfunded house you cannot do that. You can only sell when you are allowed to, which will be set out in the prospectus, but even the timing of that can usually be altered if circumstances permit.
He concludes by saying that although crowdfunding looks easy - and it has the merit of not having to deal with increasingly restrictive mortgage lenders - it carries too many risks.
The alternative is to be a hands on landlord he says. When one invests in property to let, one is not finding a cure for malaria or sending a rocket to mars. It is really not impossibly hard.