A new way to invest in property: The House Crowd

real estate A new way to invest in property: The House Crowd

 

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.

photo credit: thinkpanama via photopin cc

14 thoughts on “A new way to invest in property: The House Crowd”

  1. Not sure I understand “ If you then take interest instead of re-investing, this will produce a constant monthly income of £338.23 per thousand”? That would mean 30% monthly which is… a bit high?
    I invest with a similar setup in the UK and the “fund manager” has been returning double digits for the past 4 years but he does it full time. He invests in properties he splits in two or three then rents, it takes about 2 years to get permits and a renovation crew then he refinances with the bank and refunds investments.

    1. No – if you invest £1000 a month for 5 years then stop investing, you will receive £338.23 a month for ever. There are some complications because when House Crowd sells one of the houses, there will be a bonus from the 50/50 split plus your capital on that house returned of course and you will then need to put that money into a new property – or take it. Property investors can achieve double-digit returns from rental but that is before all the costs. Division of the average annual rent by the average buy-to-let property price gives a return for example in Manchester of about 7.6% (in London it is lower) but the overheads and management time can be large. 2 years is a long time and probably most of that is the time to get permits for change of use. House Crowd buy, refurbish and rent out almost immediately and quote a 30 day from purchase before they start the income clock.

    1. Unfortunately @Tony, it is not possible for US citizens to invest in The House Crowd anyway – or in fact in many other funds at least in the UK. I continually see such restrictions and I believe it is something to do with the IRS tax avoidance policy.

  2. Hi John

    This sounds very interesting for someone like myself who is just starting out in investing and wants to diversify a bit across stocks and property without actually buying a rental property.

    Can I ask a few questions:
    How long has this company been going?
    How long have you been invested with them?
    Can you invest within a SIPP? You mentioned consulting a financial advisor but surely you know the answer to this already having invested with them?
    Also do you know if you can invest within an ISA?
    If there are no houses that they want to buy, you can’t invest at that time, is that correct?
    What happens if there is another housing crash, and The House Crowd goes bust, are you covered by any kind of government insurance like you are with banks etc?

    If you can answer any or all of those I would be very grateful!

    Thanks alot for highlighting a possibly very interesting investment.

  3. It’s quite a new company although the originators have been in the property industry for some tine. So far it has set up about 40 houses. I should say at the outset that we are not connected with THC other than being very small investors and also that we are not qualified to give financial advice. So take what follows with as large a pince of salt as you like. For further details contact The House Crowd themselves.

    Some people in the industry criticise it but I don’t think they understand how it works. All the properties so far are at the bottom of the market and may be repossessions or otherwise empty. There are so many unused properties in this country (about 900,000 so I believe) that it is quite obscene really – apart from the number of new build approvals that are not built (a further 300,000). Bringing all those to fruition will solve the housing crisis and adding unused office space will provide a lot of temporary accommodation. Of course this may lead to reductions in rents, which the powerful property lobby certainly won’t like.

    However we are where we are and anything that gets houses back into use has my support.

    The key is that each property is owned by a separate limited company (called a Single Purpose Vehicle) – you can find them all on the Companies House website – so it is functionally separate from TheHouseCrowd company. The Directors of each house company are the same – and are directors of THC. THC supplies all the logistics, repairs, legal, finding a tenant. The money is held in a Solicitor’s client account on behalf of the investor. We certainly wouldn’t put money into any timeshare or other property marketing scheme.

    Each property is therefore funded by a series of investors who either buy preference shares or lend money. I don’t know about the latter but dividend income from shares does not attract any further UK tax liability for people on basic rate tax (and the margin only if you are on higher rate tax). So the 6% is exactly what you get, unlike in many other investments where it is either taxed at source or is subject to tax.

    We have been investing a smallish sum each month for the past three months so we really can’t comment yet but they seem pretty straight. We decided to do this for a year to give us a passive monthly income stream. We will review it then.

    It is quite new so it is difficult to be sure but the separation of entities should mean that all properties are independent of each other and of the ‘parent’. Because they get the money from the investors upfront, there are no mortgages to bother with and the best offers can be made. So far all the investments have been made in the North West.

    Anyway they are not far away from us so we can go and bang on their door if necessary!

    If they find no houses, you are correct that there would be no investment opportunity. But typically at the moment they are funding 3-4 houses per month. Sometimes these are offered but other times they have investors who have instructed them to roll the money into the next property so if these properties are already fully funded, they are not offered.

    The downside is that you get the dividend annually, starting about 13 months after the initial investment. The upside is that you have literally nothing to do other than signing a form and sending the money, which is all held in a client account. If you purchase a preference share then you would also have a 50% share of any uplift when they come to sell. Since they will only sell when the increase is 25%, this means that you would have a 12.5% return in addition to the 6% return. I am not sure of the tax implications but unless the house takes 8 years to increase by this amount, a simple calculation suggests the preference share is a better bet although if you invest for interest only you get 7.5% paid twice-yearly rather than annually.

    As far as ISAs and SIPPs are concerned, these are not appropriate instruments IMHO. They give you a tax wrapper but the income from the investment is tax-free anyway for people on basic rate and only the marginal higher rate tax is payable for those on higher rate tax. Since there are limits to how much you can put in an ISA or SIPP, it is better to use your taxed income for that – particularly for a SIPP as the government tops it up. But beware of putting money into SIPPs if you are much younger than 55 because you really cannot get any of it out – it is completely illiquid.

    Mentioning liquidity, there are provisions to sell your shares after a period of time but, like all property, I would not regard the investment as particularly liquid.

    This is not a financial investment – you either lend money or buy preference shares. In neither case would you be covered by the FSCS anyway but then 100% safe money pays no interest – nor should it these days. If there is a housing crash (or we suddenly start to build lots of houses and/or rent controls are re-introduced) I don’t think it will affect the investments. I guess THC makes money as well but the contract is to pay the 6% so that should not be affected. On the other hand it would mean that the property would not be sold as the condition is a 25% uplift, which would not occur if the market crashed.

    Register as a potential investor and you will get an invitation to invest for the next property. If you request the information, you will get all the documentation. You are not committed until you send back the signed document and forward the money to the Solicitor. Note that because they don’t make offers until they have all the money, you don’t know what property is involved until after the event. This way it also stops unscrupulous investors nipping in to up the price.

    Anyway I hope that helps. Thanks for reading us!

  4. John wrote: “Each property is therefore funded by a series of investors who either buy preference shares or lend money. I don’t know about the latter but dividend income from shares does not attract any further UK tax liability for people on basic rate tax (and the margin only if you are on higher rate tax). So the 6% is exactly what you get, unlike in many other investments where it is either taxed at source or is subject to tax.”

    According to my understanding this is incorrect. I wonder if you have had any actual payout in which case you will be clearer on the true situation?
    I understand that this 6% IS ALSO GOING to be taxed at source so the 6% you are supposed to be paid at the end of the year is BEFORE deducting the tax.

    If I invest £1,000 then I should get £60 every year for my 6%
    However if we first deduct 20% tax then that is £12 less and I will only get £48 for every £1,000 investment.
    This equates to 4.8% net return on your money

    Is this correct?

    1. Thanks for getting back, @ZTA but my answer from my understanding is ,no, you are not correct.

      Dividend paid to UK taxpayers is always assumed tax paid for basic rate taxpayers. The dividend should come with a tax certificate. There is AFAIK no mechanism for taxing this at source anyway. These are small single purpose vehicles that are set up purely to own, manage, rent and eventually sell a property. Investors either hold preference shares which pay 6% or loan notes which pay 7.5% but do not participate in any eventual capital gain.

      There is additional tax to pay for higher rate taxpayers (40% and 45%) and the income will need to be declared on your tax return.

      I queried this with Frazer Fearnhead some time ago as in the comparison between annuity rates and THC dividend, he had not realised that this was an additional advantage – annuity quotes are always before tax. I don’t know whether loan notes would attract tax at the basic rate.

      We have only recently started investing in THC so we haven’t as yet received any dividend – we will do so next November.

      I hope this helps but we do not represent THC at all and your question is better directed to them or an accountant if you want an authoritative answer, particularly on the issue of tax certificates and tax liability on loan notes.

  5. You are paid 6%.

    So if you invest £1,000 then you will earn £60 which is 6%.

    But then after you ‘get’ the £60 – the tax will be deducted.
    You will therefore receive cash of £48 and a tax certificate for the £12 tax deducted.

    As you are the investor, I think you are entitled to clarity.
    I think you should ask THC the simple question
    “Is my 6% return before or after tax?”

    I look forward to your update.

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