How savers can use an Innovative Finance Isa to reap the rewards from the property market
"If things go wrong (and they can), then a property-backed Isa at least means that there is a tangible asset that can be sold to recover your money,” says Frazer Fearnhead, chief executive and founder of property peer-to-peer lending platform, The House Crowd.
“While it’s not a guarantee, it does mean that the secured property would have to suffer a significant fall in value before any of your capital was lost.” Ultimately, having your investment secured against a physical asset gives investors significant downside protection.
An Innovative Finance Isa, or IFISA, can be an attractive alternative for investors who want their Isa money to work harder than cash, and who would prefer to avoid the turbulence of the stock market. And the IFISA makes it really easy to invest in the property market.
Property is an asset most people understand – it certainly doesn’t feel as elusive as stocks and shares.
Houses are something that we draw when we are children, and which we aspire to own throughout our lives.
According to a recent ONS survey, 49 per cent of people think that property is the best way to save for retirement. It’s therefore no surprise that Bricklane.com’s chief executive Simon Heawood thinks that “investing in property through an Isa is the most tax-efficient way to do so, with no tax on property gains or income”.
He points out that many investors are attracted to the fact that residential property delivers returns through rental income and potential capital growth. “The long-term undersupply of housing will likely lead to continued upward pressure on house prices, while rental income from residential property has typically correlated with inflation – both of which make the asset class attractive from an investment point of view.”
On the property ladder
Investors can open one IFISA per tax year, and have an annual subscription allowance of £20,000, with substantial tax-free returns.
There are also several different opportunities available when it comes to property IFISAs, including buy-to-let and development.
For example, you could opt to open an IFISA with a peer-to-peer platform that facilitates bridging loans, which are often used to fund borrowers over the short-term while they refinance or sell a property.
Development loans, which provide finance to help build new properties or conversions, are also common.
Essentially, the P2P platforms conduct due diligence on the borrowers, before connecting them to investors by issuing a loan note.
With companies like CapitalRise, which offers an IFISA that is backed by investments in property development, investors can simply transfer in underperforming Isas from other providers.
With most providers, investors can apply to become a member in minutes, and access opportunities directly through the website.
Let’s get real… estate
We’ve touched on the types of property investment, but the products and services available vary significantly between providers.
For example, companies like Crowd Property offer tax-free interest through its IFISA. The company frequently launches different types of property projects, with loan terms between six and 24 months, loan sizes from £100,000 upwards of £5m. The company also claims to have a rigorous due diligence process to carefully select borrowers, all of which are SME property professionals.
Chief executive and co-founder Michael Bristow says that his company offers a “variety of projects and investment products to suit any investor’s wants and needs”.
“For every property project that we launch on the platform, we release detailed information 24 hours prior to launch, and also conduct a webinar with the borrower and our expert host. Investors have ample opportunity to learn more about the borrower and their experience, and the project and its specifics to get to grips with the numbers.”
Shojin is another company that offers investments across the property spectrum, offering both debt and equity investments.
“IFISAs are available for all our debt products,” says chief executive Jatin Ondhia. “We also offer corporate bonds, from which the funds are then used to spread across a range of investments. This presents a lower risk because investors are not exposed to an individual product, but the entire range of investments that we have.”
If you’re interested in an ultra high net worth property investment that sit within an IFISA wrapper, CapitalRise gives a retail investors access to prime property investment opportunities.
You can scoop up potential returns of eight to 12 per cent, which can be held in the tax-free IFISA wrapper.
Individuals can invest from £1,000, and all investments are secured against exclusive property development investment opportunities, in locations such as Mayfair, Knightsbridge, and the home counties.
Safe as houses?
But as with all investments, there are risks associated with property IFISAs, particularly with the gloomy spectre of Brexit on the horizon.
Companies recommend that you do not invest more than you can afford to lose without altering your standard of living.
Property Crowd offers short-term loan investments secured by legal charge on title of property assets.
Rohin Modasia, chief executive of Global Alternatives, which owns and operates the Property Crowd, explains that risk is mitigated by ensuring that all loans listed are professionally originated, and managed by specialist lenders.
“Our panel lenders have skin in the game in every deal, ensuring that loans are originated and underwritten competently and with long-term commercial common sense.”
Real estate investments are specifically designed for professional investors who understand and appreciate both the risks and returns involved.
At Capital Rise, investments are secured against prime property assets, so in the event of a borrower being unable to repay the loan, investors can force the sale of the property. Provided the property sells for 66 per cent of its value, investors capital and return will not be at risk.
CrowdProperty also goes to extensive lengths to ensure capital is secure, reflected by the fact that the provider currently has no late loans across its substantial loan book.
Bristow explains: “For every project launched on our platform, we hold first-charge security over the property in question. This means that, in the unlikely event that the borrower defaults on the loan, CrowdProperty’s expert team can take ownership over the property and project.”
If anything doesn’t go to plan, the team will analyse the most profitable route to completion in order to return capital and interest to investors.
While investing in property isn’t without its risks, it can offer you significantly higher returns than if you left your money sitting in a bank.
And with an IFISA, you now have an opportunity to diversify your savings across a wider set of asset classes, providing an innovative place to house your money.