Frazer Fearnhead, chief executive of The House Crowd, explains how peer-to-peer property lending can be a great tool for income-seeking investors
BANK SAVINGS RATES are at an all time low and stock market returns are volatile to say the least. So it is no surprise that investors are looking at alternative options.
Since it was founded in 2012, The House Crowd has been offering an attractive alternative for frustrated investors. The majority of The House Crowd’s investors are now income-seeking and they have earned more than £40m in consistent returns over the past seven years, by investing in secured property loans and development finance.
“People invest for different reasons,” says Frazer Fearnhead, chief executive of The House Crowd. “There are those who would argue if it’s best to invest for capital growth or for income, but my view is that capital growth is speculative.
“You can look at the housing market for example and you may consider that properties always go up in value – and they may do over a sufficient time frame, but it’s speculative. You’re at the mercy of the marketplace.
“Whereas investing for income is putting money into assets that pay out on a regular basis, regardless of whether the underlying value of that asset is going up or down.”
Of course, that doesn’t mean that investing for income is immune from risk. There is always a possibility that the borrower will default on a payment, which can reduce or even eliminate your returns. And then there is the issue of capital preservation.
“Preservation of capital in many ways is more important than the overall return you get,” says Fearnhead. “One of the biggest strengths of our investment model is not just delivering great returns when things go well but the safety net that is in place to protect your capital if things don’t go to plan.”
The House Crowd does this by lending money only to property owners and property developers and by taking a legal charge over each and every one of these properties. This means that if the borrower doesn’t pay back the loan, the platform has the legal right to repossess and sell the property to try and obtain its market value. As a result of this rule, The House Crowd has recorded no capital losses in respect of its loanbook to date.
“Of course people have to choose their own criteria for risk and reward and assess those risks,” explains Fearnhead. “It’s always best to diversify your available capital over a wide spread of investments, because, with the best will in the world, there is always a risk, and something can go badly wrong with one particular investment.”
The loans on The House Crowd’s platform offer target returns ranging from six per cent to more than 10 per cent, but Fearnhead warns prospective investors to resist the allure of the double-digit returns, especially when they are investing for income.
“It does frustrate me when people see the headline interest rates and just go with the highest interest returns,” he says. “There is a correlation between the interest rate you’re getting paid and the risk. You should only put a small amount of your available capital into higher risk loans and accept that there are likely to be more problems in delays and recovery than with lower LTV loans.”
By doing all they can to mitigate their clients’ risks, The House Crowd is able to give them peace of mind, so they can benefit from the best ratio of risk and reward, with minimal fuss.
This article featured in the August issue of Peer2Peer Finance News, available to read online.