We have been considering property investment for some time now and have been writing about it on our new sibling site The Investment Principle. There are many TV programmes and other indicators which suggest a return on investment of 5-10% is reasonable in the UK. There are also opportunities overseas with much larger promised ROIs but we are a bit nervous about these.
It probably comes down to buying housing for rent to young single people, friends and young families, often looking for social housing which doesn’t exist.
We have considered all of these and have generally come to the conclusion that, for relative amateurs, it is a large step.
You need to:
- find the property,
- get the price down as far as possible,
- arrange a buy-to-let mortgage because we don’t have that much money yet,
- find a decent builder who can jump in immediately the purchase is finalised,
- shell out a load of money for refurbishment,
- project manage all this,
- find decent tenants who won’t trash the place,
- keep on top of maintenance,
- blah blah blah.
When tenants leave a lot of this has to be run through again.
If you want to make a decent return, you need to sell the property which in itself is another essay. In particular we suspect that property price increases that were common ten years ago will not return and with the government-promoted housing bubble, you could be left with a large investment and no capital growth if you get the timing wrong. Or worse, the bank could foreclose the mortgage on some pretext or another.
So managing property is anything but a passive occupation and will not deliver the passive income that people are looking for to get out of the rat race. But it still gives better yields than just leaving it in the bank so we are keeping our eyes open.
It was therefore with great interest that we looked at a new way to invest in property which combines taking all the management decisions off the investor, crowd funding rather than depend on banks and still gives a reasonable return on investment with the prospect of some capital gain at the end of the day. This system is called The House Crowd and it is simple, really simple.
Now we like simple – it means that we don’t have to spend too much time thinking about the nuts and bolts so can concentrate on the big picture.
How does The House Crowd work?
It brings together investors who put small amounts of cash (minimum £1000) into a special account which is used to buy a particular house, pay all the legal fees, refurbish it and let it out. The promised return on investment is 6% paid annually and when the property is finally sold, there is a 50% of the profit to be shared amongst the investors. De facto, you become a shareholder and really don’t need to do anything.
The House Crowd team can do that because they:
- buy at the bottom of the market – £50,000 is a typical purchase price – which give a better return on investment. Some of the houses may be repossessed but, sad though that is, if House Crowd doesn’t buy it then someone will.
- don’t need a mortgage at all – it all comes from the crowd funding
- can keep builders and maintenance people busy on the extensive portfolio
- know how to get tenants and, importantly for us, are quite prepared to take tenants on welfare which is an area that many landlords are moving away from
- know how and when to sell the properties
The House Crowd pays all maintenance, void periods and other costs so these expenses don’t come out of the investors’ 6% ROI. You can sell your share at any time so there is an exit strategy should you need one.
This is not for the full-time professional property investor but that is a job; investing in The House Crowd, on the other hand, will deliver passive income.
How much can you build with regular investment? And how should you arrange this for the ultimate regular passive income you may need? The trick is clearly to invest regularly as the interest is only paid annually. For example if you were to invest £1000 a month for 12 months and stop, then for all years after that you would receive £60 interest. But what if you add that interest into continued £1000 a month? How much could you build in 5, 10 or 15 years? And what monthly income would that produce if you were to stop? Because this seems to be a way of building a retirement fund that will continue to produce.
I did some sums. In 5 years you will have actually invested £60,000 but if the income from years 1 onwards are invested instead of taken out, then the total invested would be £67,645.12. If you then take interest instead of re-investing, this will produce a constant monthly income of £338.23. If you do this for 10 or 15 years, the figures are £790.85 and £1396.56 per month.
So someone in their early ‘50s having paid off their mortgage and finding a couple of thousand to spare a month could end up with a ‘pension’ of almost £1,600 a month after 10 years. Bear in mind this is dividend income – there is no further tax to pay for basic rate taxpayers. And this could be somewhat more if the properties are sold at a profit from time to time.
The House Crowd also offers an option to invest for interest only which pays 7.5%; were you to choose this option assuming you invest £1,000 per month in five years you will have £69700.69 invested which will generate £435.63; in ten years your investment could generate £1,061.03 per month, and in fifteen £1958.88. Were you to invest £2,000 monthly for ten years you could end up with retirement income of £2000 per month. All totally passive!
This of course begs a number of questions. Firstly will there be a continuous supply of houses in which to invest? To get a regular income you need regular investments. It may well be that the supply falters from time to time but in that case, you can just accept some irregularity and invest more when there is opportunity. With simple management these things can be smoothed out over time.
You also need to take careful tax advice. It always makes sense to ask an independent financial advisor whether you can make the investments within a SIPP – self investment pension plan – or alternatively to do it via a limited company, which is possible.
Having looked carefully at the opportunities of The House Crowd we believe that it offers an interesting and promissing investment model; we also expect it to grow substantially.