How can short-term investors make money in today’s property market?
External pressures are converging to force a rethink of how property can work as an effective investment asset. But with the right approach there are still strong returns to be found.
As one of the major asset classes alongside cash, shares and bonds, property has typically delivered strong income, diversification and yields relative to other investments. However, the world of property investment is fast moving and ever changing, forcing sophisticated investors to rethink paths to profitability.
Identifying the pitfalls in traditional property investment models can help to synthesise an alternative approach.
Pinpointing the pitfalls: Buy-to-let
Probably the best-known approach to property investing is buy-to-let. For over two decades, buying a property to rent out was viewed as a relatively straightforward investment model, with landlords reaping the benefits of both capital growth and significant monthly income.
However, the buy-to-let landscape has changed considerably in recent years, with landlords hit by a range of additional costs and new regulation, including:
- The 2016 introduction of a 3% stamp duty surcharge on second homes
- The tapered reduction of mortgage interest tax relief, to the basic rate of 20% for all landlords by 2022
- Tighter regulation of buy-let-mortgages and stricter eligibility criteria
- The threat of interest rate increases affecting mortgage affordability
These factors, added to the everyday practicalities and costs of maintaining properties and recruiting and managing tenants, have led many landlords to cut their losses and exit buy-to-let for good.
Pinpointing the pitfalls: Property funds and unit trusts
One alternative to buying a rental property, which has risen in popularity with private investors over recent years, is to invest in a property fund or trust.
Many property funds are unit trusts or open-ended investment companies (OEICs). Known as ‘collective investments’, these pool your capital with that of other investors to invest it in a basket of property of assets.
Investing in a fund or trust has advantages. They are a relatively liquid asset and the minimum investment threshold is low. However, investors need to bear in mind that:
- Transparency can be limited in terms of knowing what properties you are invested in
- The value of trusts listed on the stock market can fall or rise as a result of wider market and macroeconomic factors
- Actively managed funds typically attract fees which can eat into your overall profits
Pinpointing the pitfalls: Self-managed property development
A third option, which peaked in popularity during the last property boom, is to buy an individual property to renovate and resell.
For the entrepreneurial spirit this approach can be very appealing. However, for the serious investor looking for strong returns rather than aiming to indulge their grand designs, there are some clear reasons for caution:
- Fixed costs include estate agent, solicitor, architect and surveyor fees
- Stamp Duty Land Tax is payable on the initial purchase*
- If building work is delayed or a property takes time to sell, additional mortgage payments can quickly eat into profits
- Suitable properties with the potential to add value can be hard to source
- Project managing building work effectively involves both expertise and detachment
- Construction costs can escalate due to increases in the cost of building materials or labour
A better path to profitability: Investing via private equity and mezzanine loans
Our unique platform connects investors with high-quality property development opportunities that were previously only accessible to ultra-high net worth investors. It allows investors the freedom to pick and choose the projects that best fit their investment requirements and to build a diverse property investment portfolio. We do this by offering investors who qualify two distinct investment vehicles:
Private Equity: Our investors collectively take an equity stake in a property development through a Joint Venture Agreement (JVA) with the developer and share any profits with them upon exit (typically a 50/50 split). The investment is secured against the title deeds of the property, backed up by a personal guarantee from the developer. Cogress ensures the JVA includes clauses specifically inserted to mitigate investor risk. The approach is exit-orientated, so timeframes are typically 18 months to three years from initial investment to cashing out. Expected returns are 15-20% p.a.
Mezzanine Debt: Our investors collectively provide funding in the form of a Mezzanine loan to the developer. Investment returns on the project take the form of interest on the loan plus an agreed share of the profits.The investment is secured with a second or third charge against a property, alongside a personal guarantee from the developer. Returns of 12-18% p.a. are expected from this approach, with an 18-month to 3-year timeframe for exit.
A More Evolved Approach
Cogress are at the forefront of this more evolved approach to property development investing. With investment starting at £20,000 and new property development projects launching every month, our registered investors can pick and choose those projects that best fit their investment requirements to build a diverse property investment portfolio via either private equity investing or financing mezzanine loans to developers. There are four key ways in which Cogress differs from a basic partnership or crowdfunding model:
- Thorough and meticulous due diligence including analysis of line-by-line costs, risks, saleability and market comparables;
- Underwriting of every project by Cogress to ensure all financial and investment prerequisites are met for commencement – we fulfil any shortfall in fundraising to guarantee the development goes ahead as planned;
- Ongoing portfolio management including monthly site visits and quarterly reporting to investors;
- Absolute transparency and clarity provided to investors on every aspect of the investment process and on each stage of every property development.
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How it Works
To find out more about the Cogress approach to property investing, explore the How it works pages of our website, or get in touch with our Investor Relations Team.
*From 1 April 2016, you’ll have had to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property.
 UK Government, ‘Higher Rates Of Stamp Duty Land Tax (SDLT) On Purchases Of Additional Residential Properties’, UK Government, 16 March 2016. Available at: https://www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties
 UK Government, ‘Restricting Finance Cost Relief For Individual Landlords’, UK Government, 6 February 2017. Available at: https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords
Always seek independent advice. This blog has not been approved as a financial promotion by Cogress Limited. We are not responsible for the content of external websites. Potential investors must rely on their own due diligence prior to investing.