Although now an older article, it can still describe well what Property Partner is all about. In one sentence, it is a digital property crowdfunding platform where anyone can invest in buy-to-let in various UK locations.

The recent news prompted me to write about Property Partner which I kept putting off for a while.

Property partner has been acquired by a US company, “Better”!

Better is a much bigger company that offers mortgages, insurance and more. They operate in the US but through Property Partner, they now want to offer US and international properties to UK investors. Sounds promising!

Key changes from 1st October 2021:

1. Fees dropping from 1.2% to 1.0% per year. If investing more than £25k the same 0.7% fee remains
2. Scraping the £1.20 per month account fee
3. Dramatically expand new investment opportunities on the platform (US and international)
4. Improve mortgage financing on properties to enhance investment returns for all clients
5. 2-4% investor cashback for providing liquidity

I’ll share my views on these changes below.

1, 2. Property Partner lower fees

Performance comes performance goes, fees never falter.

You can argue that a big reason the secondary market trades at such a big discount is that more people want to leave the platform than join due to loss of trust after Property Partner introduced new fees and the way they did it.

Lower fees are always welcome.

PP investors currently pay an annual fee depending on the invested assets in the platform. This is now changing to:

• less than £25,000: annual fee = 1.2% -> 1.0%
• more than £25,000, annual fee = 0.7%

For a £25,000 investor, the fee is now £250 instead of £300. Add the removal of the monthly account fee (£1.20) and we’re paying £64.40 less a year. Not a life-changing amount but I’ll take it.

Above all, it also shows the intention and a path in the right direction.

Yes, I want to see more of that.

3. Property Partner offers US and international property

I think the expansion to US and international markets is a really interesting one. I’m not sure whether the “international property market” will include the EU as well but I hope so.

I keep saying that I’m not very optimistic about the UK property market. The pond is too crowded. It keeps defying gravity and proving me wrong 🙂

But it’s not a zero-sum game. I would love to see both the UK and say, Germany or Greece do well. I would love to have the option to invest in the Greek market in a one-click fashion like I’m doing in the UK. The high prices in the UK have dropped the net yield from rent. As a result, it’s much harder to get a high income-producing portfolio.

A BIG benefit of this approach is that we will have the chance to invest in NEW LISTINGS. This means new opportunities and fresh new properties on the platform.

I haven’t seen a new deal in ages, apart from the development loans. So overall, I welcome this change.

4. Improve mortgage financing

Better offer homeownership products and services. It looks like Property Partner can greatly benefit from Better mortgages (sorry, couldn’t resist!), effectively making it a win-win between their platform and the end-investor.

This has been a hot topic during the PP premium client meetups I attended pre-COVID.

Since PP owns such a big property portfolio (>£100m) why can it not negotiate better terms with the banks? They must do something which can result in higher investor returns.

After the integration with Better, I am glad it’s on the table.

5. Offering 2-4% cashback for buying on the resale market

Basically, Property Partner are paying you to buy shares in the secondary market. We all know liquidity is dry there, and that bigger investors have trouble buying or selling without moving the market.

This incentive will hopefully improve things.

If you invest more than £10,000 per month then you’re eligible for a cashback.

• £10k – £20k -> 2% (max £200)
• £20k – £50k -> 3% (max £900)
• £50k – £250k -> 4% (max £8,000)

Example: If I buy multiple properties for a total of £30,000 value in the secondary market, I will be paid £900 to do so. Do not forget there’s a 1% fee when buying in the resale market. When taking that into account, the total cashback is £600.00.

Again, not a bad idea to incentivise investors to bring the resale market back to life.

Property Partner investing in a post-COVID world

Properties are valued every 3 months by an independent market surveyor. For a long time, properties trade at a much bigger discount (10-20%) to what the surveyor says they’re worth.

As with any financial market, it is not the locked AUM that set the price, but the direction of flows.

In plain English, more people want to sell than to buy in Property Partner. This can dramatically drop the price even if the sales taking place are only a small fraction of the overall invested amount.

Right now, it is a buyers market. Sellers have to really offer a discount to incentivize the buyer. There is no meet me in the middle.

The secondary market is on sale for quite a while. Selling relies on other investors buying in because for every seller you need a buyer. At the same time, independent surveyors value the properties at a much higher amount than what buyers are willing to offer. Who to trust?

So there is a big gap.

Who to trust? The resale market or the independent surveyors? Perhaps the resale sellers are knowingly wrong but this is what they are willing to pay to exit the Property Partner platform! However, there are some properties that trade at a premium!

Such as this Aberdeen university block of flats which has an almost-guaranteed rent leased to the university, despite uni properties being the last thing investors want.

So I don’t know, but here’s how I go about it.

Resale Market VS the Open Market

Luckily, Property Partner has existed for more than 5 years. As a result, some listings are now due for an ‘exit’. PP have to go to the open market and sell the properties.

Eventually, it is the open market that will decide whether resale investors are right or wrong. Wait until the 5-year exit mechanism kicks in, and see what the properties actually sell for!

Given the depressed secondary market prices, I would expect to see losses when selling at the open market.

But on the contrary, the latest selling records show that when Property Partner sells at the open market it has achieved a 25.4% total return for 5 years, so 5.2% per year after all fees and taxes (Sept 2021).

Here is the selling record, sorted from earliest to latest.

PP started listing properties in 2015, so most sales have taken place in 2020-2021 (5-year exit mechanism). You can also click on individual properties and find out more details in the description.

25.4% total return gives me hope! This total return is also based on initial listing prices. These were much higher than the depressed resale prices we see today. So all else being equal, returns should be higher for the “late” investor.

I also think PP shoot themselves in the foot by advertising the Resale market index first thing on the homepage.

As an investor, I don’t really care how much I can sell my properties in the secondary market right now. I mean.. ok, that’s good to know, but I’m more interested in what the actual value of my properties is in the real world.

See what I’m talking about, Resale market index below:

Property Resale Value index

And now look at the Independent Property Valuation picture which is NOT showing by default. This is basically what really matters as a long-term property investor.

Even worse, the Resale market does not show the total return I’m getting, half of which is typically dividends!!! See the selling record, dividend return is 13.0% out of the 25% total return.

As of their latest July report, average annual dividends are now 4.6% (3.6% after fees if you are investing <25k, 3.9% if >25k).

Not all properties are made equal

Even the Independent Property Valuation doesn’t paint the whole picture because it’s an average view.

Post-COVID everything has changed.

We have 2 kinds of properties. Those impacted by COVID (Purpose Built Student Accommodation (PBSA), city centre flats no garden) and those that are not. PP has a big chunk of university accommodation which is depressing the average index.

I would be much more interested in viewing the non-PBSA index and see how the other properties perform in aggregate. That will tell me whether Property Partner tracks the UK property market well which in total, has been doing well.

In any case, seeing positive numbers when waiting to sell at the open market is good news for me. Property should not be traded in/out every year. This is also what people do with the traditional Buy-to-Let. They hold on to it for at least 5-10 years.

Overall, these are the stats I’m interested in and in the following order:

• How much has Property Partner made for investors over time (based on RICS valuations and actual sales if possible)
• What is the non-student-accommodation property price index
• What is the resale market value over time (the current PPX All-share index)

The last time they had reported the Total return for investors, was in March 2020 and without taking Covid revaluations into account. That was 5.7% per year.

My personal stats

When it comes to picking properties you can say that I’m a terrible investor (or just say unlucky ;) )

In my personal portfolio, in November 2019, a few months before COVID I wrote:

As of end of 2019, the average return since Property Partner launched (2015) is 6% per year if properties are sold as whole units. However, if we follow the intended method of sale, which is to sell units one by one, then Property Partner has achieved a 9.6% total return since launch. That’s a big if, but Property Partner has already managed to sell 4 properties so far.

November 2019

It’s nice to see that this is actually happening. More and more unit blocks are being sold as separate units to either enhance the property balance sheet or pay down the mortgage.

Judging from their selling record, 23 properties have now been either sold or offer-agreed.

They typically buy in bulk and then offer higher “break-up” value to investors.

I also wrote:

My personal returns are 5.67% after fees so around 6.5-7% before fees in the last 12 months.

November 2019

Post-COVID, the picture is pretty bad! 1/3rd of my portfolio is university accommodation so overall I am down 8% in total! This hurts and I am not sure if / when the PBSA situation will improve.

Excluding my university investments, my personal returns are 3.2% after fees. If we include my development loans, then my portfolio is up 5.7%.

Speaking of which, I think the development loans have had a good run and are not getting enough attention. I know some people who only invest in development loans.

University accommodation investing (PBSA):

The love for the sector comes because as an LTD company investor I prefer a dividend-heavy portfolio. The tax advantages are just massive. See my previous post on How taxes work at Property Partner.

You might be one of the lucky ones that invested in Aberdeen PBSA where Robert Gordon University guarantees the rent. The rent is even linked to RPI inflation so goes up every year! As if that’s not enough, the property was revalued to 2m, an 8.1% increase.

I will continue to collect the rent from my university accommodation, which surprisingly some universities pay. For example, the PBSA in Newcastle-upon-Tyne has actually increased the dividend from 4.0 to 4.5% and it’s currently trading at 0 discount/premium.

That’s not the case with my Bangor, Wales PBSA which has been a disaster (-47.55%).

At least the development loan in my portfolio compensates for that. 9.5% annual return, partially repaid and progressing.

One thing to note on Property Partner pages: The dividends (rent) is now being quoted AFTER fees which is nice.

Is now a good time to invest with Property Partner?

There are some big discounts in the property resale market that can prove to be good investment entry points.

If those discounts are real, meaning the properties can sell at their RICS valuation then things look good.

Having said that, I would like to see how the Better acquisition will play out before investing. I want to see what kind of new properties will bring to the platform and how they will communicate/treat investors.

Perhaps if you are willing to allocate a certain amount to property, add a percentage to Property Partner and gradually enter or exit accordingly. It is what I have been doing with my experiment.

Some people were hesitant to invest with Property Partner because it’s a small company with an uncertain future. I believe PP will be in a much better position financially speaking now that is backed by such a huge US company with plans to go public in Q4 2021 ($7.7bn valuation).

Also, Better have just bought another UK company, Trussle, which is a popular UK mortgage provider. I’m sure there are synergies at play again here.

All things considered, if you want full control of your properties then you can’t beat the traditional buy-to-let route. It’s just not for me, not yet at least :)

As always, I cannot provide any advice and you are responsible for your investment gains and losses respectively.

It has been a tough ride! Perhaps you, like me, have invested in university accommodation and are experiencing losses too. Especially in a booming property market that’s not great to see!

It also shows the power of diversification. Property makes up about 15% of my portfolio. Invest in multiple assets, regardless of how confident you are. Covid is a bright reminder that not everything can be known upfront…

Other property choices can include the traditional Buy-to-let route which gives you the ultimate control or REITs. I have previously mentioned Real Estate Investment Trusts where you can get exposure to commercial property managed by a team of experts. They are also completely hands-off (except the research part!) but more highly correlated with the rest of the stock market.

Right now some UK REITs trade at big discounts to their net asset value, like BMO BREI, Standard life Investment trust (SLI) and SREI that pay dividends.

All things considered, I see the Property Partner acquisition as a good thing. Lower fees, liquidity improvement and more property choices. Whether what’s promised is delivered remains to be seen…

Until then, I want to hear from you… How has your Buy-to-Let or PP portfolio performed? Are you doing something different, perhaps Airbnb? Are you happy with your property investments?

On a related note, I believe it is a good time I interview Property Partner and clarify some of the above and their future plans. What would you like to ask? Post your questions below.

As a reminder, if you want to support this blog consider signing up to Property Partner using my affiliate link. Helps me and the blog to keep going. Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!

I first wrote about Property Partner in 2018. Since this is a new breed of platforms I thought of starting with a capital of £10,000 and topping it up every year.

I always liked Property as an asset class. UK property owners have done very well in the past 40 years. I doubt things will look as rosy in the future but I still want part of it despite the challenging environment.

I certainly don’t want to be 100% stocks/bonds which is why I consider property to be a good alternative.

The reason I invest through Property Partner is simple. Diversified property portfolio across different UK areas with no hassle of managing tenants or sourcing properties. I guess you can do the same with REITs but they focus on commercial properties instead. I also don’t like the fact REITs are highly correlated with my stock investments.

Some history to where we are now

Things started very well with Property Partner. I started investing in 2018 and I was really happy with the fee structure. Basically, a one-off fee on the way in. That was too good to be sustainable.

Then Property Partner increased their fees substantially for smaller investors. From mid-2019 on, you pay 1.2% fees up to £20k portfolio and 0.7% after that. As I reported last year, my personal returns were 6.5-7% before fees but 5.67% after fees in the first 12 months of investing.

Higher fees dropped the appetite and brought dissatisfaction and a feeling of mistrust to investors. I judge from the conversations I had with many of you. Of course, you have the option to sell in the secondary market, but this dropped after the news.

Property Partner wouldn’t exist as a company anymore had they not increased their fees. So I totally get it.

I decided to stay the course because property values hadn’t been impacted so much. It’s frustrated investors who want out that drive the market prices – and that’s understandable.

Just when PP tried to re-build its branding and attract new investments COVID hits. The forced shut-down meant that 8.4m people are under the UK furlough scheme. The government pays 80% of their wages – IF they are not made redundant. I’m sure some people lost their jobs and didn’t get a penny. Others in the gig economy (think your Deliveroo driver) can’t take advantage of the government pay.

Eat or pay the rent?

I’m also sure some people are trying to take advantage of the situation. They ask for rent holidays or reductions without being affected. Like my friend who got a 50% rent reduction for 2 months while still working full-time from home. And which landlord would want a vacant property in this climate?

I’m not sure what to believe though. One report saying that rent arrears have only increased by 3%. Then Citizens Advice found that 2.6 million private renters have already missed, or expect to miss, a rent payment due to the crisis (1st May ’20). And here’s Property Partner’s rent arrears stats as posted in their latest post:

PP has suspended dividends in all properties to make sure each property can pay its mortgage now that so many properties have reduced rent. Suspending the dividends is also a condition by the banks if you want to freeze the mortgage.

Initially, this was only up to March 2020. But now they’re extending it to September 2020. This doesn’t mean that tenants don’t pay the rent. The rent payments for the 70% who’re not in arrears accumulate in each property.

Net income that is earned in the next 3 months will accumulate within each property’s bank balance, for the benefit of that property’s capital reserves and that property’s investors.

Property Partner on the property webpage

Rent accumulates inside each property fund but is not paid out to us.

Suspending the mortgage payments means that the outgoings are also very small for us, investors.

In this climate, landlords get a mortgage holiday for 3 months. Which is also what Property Partner said they’re doing. They have agreed to a mortgage freeze with the banks for the past 3 months and are trying to extend it for another 3 months.

But this is on the condition that the rent is not being paid out to equity holders – us. In other words, the bank says: You can’t pocket the rent while having spare money around.

So how are Property Partner investments performing during the pandemic?

COVID hit the Property Partner marketplace by 12% from peak to trough in late March. This, in combination with the previous fee sell-off, results in the market trading at a -18% discount to the property valuations reported late March.

Coincidentally, this is roughly how much the FTSE 100 is off from its February highs. -16% as of 4th of June that I’m writing this.

Property Partner haven’t given us a clear picture of how much rent we’ve lost per property during coronavirus. Also, what does rent arrears mean? How much “reduced” are we talking about on average across all properties?

If this is a 6-month freeze both in rent and mortgage payments then the PP market sell-off is not justified. The market is overreacting. But if tenants don’t pay the rent at all later on, then things are getting worse.

Rent payments aside, what about the damage to property prices due to COVID? Guardian/Nationwide wrote on June 2nd: “The annual growth rate slowed to 1.8%, down from 3.7% in April and the slowest since December.”.

You’ll need to read behind the title: “UK house prices fall at fastest rate since 2009 amid coronavirus crisis”. Only to find out what they mean is: “Property prices are rising slower than before.”. Is this because of all the gov support and the money printing? I don’t know. But if it’s true, it’s definitely better than I expected. Maybe we haven’t seen the full impact yet.

This is why investing is hard

You have to always weigh risk vs reward. I can imagine people in 2022 saying one thing or the other:

1. Things looking good:
   Of course, Property is back up now that we’ve got the vaccine. Did you really have to sell at a loss? You’re not meant to be a property investor.
2. Things not looking good:
   You should have sold when it was only 10% down. What were you waiting for?

Right now, investor’s psychology is at an all-time low. Unemployment at an all-time high, rent arrears left and right, people not spending much fearing they will contract the virus, etc. When things are rosy, people are overexcited and happily pay a 25% premium for owning fancy fortress properties.

This is also another challenge when investing in property crowdfunding vs traditional Buy to Let. In good times, you have the option of selling at a click and cash in your chips. But unlike BTL, in bad times, you can actually see the loss right in front of your eyes.

You can’t easily find out your BTL value. Unless you sell. And nearby comparables can only tell you so much. It’s also a hassle to do the research. So you presume that the property present value probably hasn’t changed much. Or you make stories in your head that it has even increased. Since this is a long-term investment, you’ll sell it when it’s time.

But being able to sell and buy at a click comes with behavioural costs!

My portfolio and what I am doing

Some of my holdings are purpose-built university accommodation (PBSA). 30% of my portfolio to be exact. I believe these are in worse condition because if there’s no campus, there’s no student and no rent.

But at the same time, I’m not willing to sell at a 20-25% loss! I think if these traded at a 10% loss I would be selling. I’ll keep an eye on these ones. There’s just too much uncertainty around the new operational model for universities.

Someone is willing to buy from me at this price and I don’t think it’s worth giving them an opportunity for a ~10% yield down the line.

Because I am investing through my limited company, university accommodation has an added tax benefit. Rent is paid out as dividends and is tax-free. This is how taxes work in Property Partner. PBSAs represent about 30% of my property portfolio. Pre-COVID I was comfortable with this allocation, now I’m not.

My non-uni properties are performing much better. One of my favourites, The Warehouse in Chester, is down just 8% from its latest valuation of late March.

Does the secondary market expect property prices to drop 8% in the next valuation round?

My favourite type of properties are in the Northwest where prices are not crazy high (yet) , yields are >= 4.0% and where there is room for price growth. Solid properties with good fundamentals. I’m not selling those.

My development loan in Epsom, Surrey yielding 9.5% is probably not going to be ready by November 2020.

As I’ve previously mentioned, property makes up ~12% of my portfolio. I’ve always liked property and would like to get more exposure, up to 1/3rd of my net worth. But too much GBP exposure during coronavirus doesn’t make for a good night’s sleep. So I’m not adding any more money just yet.

On other news

The 5-year exit plan of properties is on hold. They’ve started a new capital discount investment plan where you purchase properties that are selling at a -15% discount or more. If properties bounce back after coronavirus there’s money to be made. But will they?

We should expect to hear next from Property Partner on the 31st of July. Until then, keep calm and carry on ;)

I’m interested to hear from you.

Those of you who run your Buy-to-Lets, have you frozen or reduced the rent? And those of who are renting, have you asked for a reduction from your landlord?

Related articles:

• Coronavirus Special: Investing during a pandemic
• The Property Partner Experiment – Q4 2018
• Property Partner Returns: How much can you really make?

Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!

This is part of my Property Partner investment series. You can find all the previous articles here.

Property Partner investing 3 years later

Property Partner Investing during Coronavirus

Property Partner Returns: How much can you really make?

Property Partner Fee Structure: Is it worth it now?

Interview with Property Partner – Robert Weaver

How Taxes Work at Property Partner

The ability to buy/sell properties to other investors in the secondary market makes it an incredible tool. It was for me what businesses call the unique selling point. But making money is the primary goal of my investments so here are some facts about Property Partner so far.

Property Partner Returns

What returns can you expect with Property Partner? Well, the historical return since the platform started is now 6%. Rental income accounts for 4.7% and 1.3% comes from property appreciation (capital gains).

Although up to 2018, Property Partner returns were at 7.3%, the stagnation in property prices has brought the returns down to 6%.

That’s not surprising given property prices have stopped growing like crazy after the referendum. Time for the North to shine and London and the South to mean revert to lower levels. Looks like my thinking was right to avoid London and focus on the “Northern Powerhouse”. That’s Newcastle, Manchester, Sheffield and Liverpool in 2018, and still is.

As of end of 2019, the average return since Property Partner launched (2015) is 6% per year if properties are sold as whole units. However, if we follow the intended method of sale, which is to sell units one by one, then Property Partner has achieved a 9.6% total return since launch.

That’s a big if, but Property Partner has already managed to sell 4 properties so far. They wanted to prove that the selling method works. They even sold them higher than the RICS valuation. PP has a big advantage buying in bulk compared to me investing on my own. I wouldn’t be able to afford a mortgage on this huge castle shown below! But PP managed to buy it and sell a single unit recently for a 95% capital gain on investor’s equity.

I don’t expect such a huge gain in future units sold, but I expect some extra “break up” value. All property units go through a RICS valuation every 6 months. But it’s still a bit early to say whether the RICS valuations are right. That’s because most properties are only now slowly approaching their 5-year exit point.

However, I think an independent RICS valuation is the closest thing we have to accurate property pricing. In most cases, they know what they’re doing better than I do so I’ll take that.

A rock-solid Property Partner portfolio

Investing in the North proved to be the right thing to do so far! It’s also probably the reason that this year I’ve outperformed the Property Partner all-property portfolio by ~3%.

PP has returned 3.5% during Oct 18 – Oct 19 across all properties. My personal returns are 5.67% after fees so around 6.5-7% before fees in the last 12 months.

The selected one in Newcastle is a Purpose-built Student Accommodation (PBSA) which is a trendy term lately. It was one of the first investments I made for a 7% annual dividend (rent). I was happy to take such a good yearly rent in our low-yield environment. I was also thinking I’m providing a nest to a foreign student studying for exams partying in his 20s.

I’ve previously mentioned it makes sense for me to invest for income rather than growth. That’s because I invest as a limited company where dividends (rent) are tax-free. As an individual, the first £2,000 of dividends per tax year are also tax-free. Then you’re taxed depending on your income level. More about property partner taxes on this link.

But income should not be the only criterion. In fact, the biggest gains in property come from the property prices going up in value, not rent. Partly, that’s because properties are leveraged with a mortgage. In PP, mortgages usually come at 50% LTV. So at a 50% loan-to-value (LTV), a 5% gain is really 10%. Even higher if the loan is bigger.

But it’s a double-edged sword in the short term… Just look at this Surrey Quays property that has fallen by -35% since PP bought it in 2016! You can now buy shares for 40p each but PP bought it for 59.36p per share in 2016! Another reason why diversification is super important when investing in property.

PP makes it much easier for me to diversify without having a £1m to invest in multiple buy-to-lets.

Some properties may have a bad run but the more properties you invest the smoother the ride. Personally, I think 15-20 properties are more than enough to get a good risk/return profile. I built my portfolio slowly and I kept buying existing holdings on the resale market. Here are some properties I’ve invested in.

My Newcastle property paid its rent to the last penny. But the uni building lost some property value according to the latest valuation. Hence the 2.89% total return.

Then this Manchester property makes more than 10% of my portfolio and has done well. Despite the drop in rent, it has increased by more than 10% since 2016. It trades at a hefty -16% discount right now. My other Manchester property (Agecroft apartments) has not increased at all since its 2017 levels which is why I bought recently.

Although I’m investing for income, I like to keep an open mind. If I see an opportunity for a 10% capital growth return in a year then I’ll snap it up without second thoughts. Tax on profits is better than tax loss harvesting ;) I’ll shortly explain how I go about selecting properties on Property Partner.

I believe lots of properties are trading at more than -10% discount due to the recent fee hike. After fees went up I had to make a decision. I either invest more money to drop the total fees or I pull out at discounted levels. I chose the first route.

Given the discounts in properties right now and the fact I still trust the people I’ve met behind Property Partner, I see this is as a good opportunity to buy more. This also drops my fees further now that I have a >£20,000 portfolio.

How I select properties on Property Partner

Selecting properties myself is harder than investing in passive mode. Property Partner offers 3 investment plans for investing in property. You just pick your investment style (Growth, Income or Balanced) and they do the rest.

I think this is a great way for investors to allocate money in multiple properties. However, not everyone likes to do that. Personally, I like to pick properties myself and be more in control. This comes at the risk of underperforming the Property Partner market.

So far, I’m beating the “index” maybe that’s just due to pure luck! Anyway, here’s how I select properties on Property Partner on the resale market.

1. Decide on investment style

First, I decide on investment style. Income means buying properties that pay good rent. I define good rent as 5% dividends or higher. Some examples are the Stalybridge property and university PBSA units such as this one and this one.

Growth means that properties have a good chance of appreciating in value. I don’t expect PBSA’s price to outperform a flat in Liverpool, therefore, I’m getting higher rent now at the cost of future returns.

Obviously, if you can get both that’ll be a nice advantage which is why sometimes I will invest in properties trading at a big discount while offering at least a 3% rent. Right now, there are plenty of these.

2. Sort by cheapest properties first

This is value investing applied to property. Property Partner offers a nice feature where you can list all properties in Data View. From the menu, click on Properties -> Data View -> Premium on Latest Valuation

If you click on Premium on Latest Valuation you can sort by highest or lowest premium which is awesome. I will usually select the All properties-by-page button at the bottom to get an entire view of the PP portfolio. It’ll look something like this.

3. Focus on properties matching your criteria

Starting from the top, I try to match as many of my criteria as possible. My criteria are as follows:

• Discount compared to the latest valuation.
• Not London or Southeast (for now)
• Higher than 3% rental yield
• Nothing obviously wrong with the property (like rent suspended due to fire investigation, etc)

A rent reduction is usually not a worry. Similar to how an aeroplane crash should actually make the airline’s next journey much safer because all eyes are on this! Usually, a drop in rent is followed by investors overreacting and panic selling. This makes up for the lost rent and then some.

If I want to make a big purchase, say £5,000 on a single property and I’m not sure, then I will also have a look at the RICS notes. When RICS make an estimate, they leave notes explaining each property valuation. You can download the RICS notes from Property Partner’s revaluation blog post. They mention “comparable information provided by Allsop” with a link.

I love the transparency on this one.

Sometimes finding the area to invest in is only half the battle. For example, I have two properties in Manchester, one is up 5% and another one stayed at last year’s levels. If I look at the RICS notes for my property I see this:

How awesome is that for finding answers in niche streets.

I think it’d be easier if PP could expose these notes per property, rather than having to download a document and search but I’m not that bothered.

Last but not least, the 5-year exit mechanic is something to look out for. It’s still early to say and there are simply not enough properties that have gone through the selling process. But I believe I will find good discounts to buy properties just a month or two before the exit. This way if PP can sell at the RICS levels then I will make a nice arbitrage. Stay tuned on this one.

4. Bid or Buy

Once I’ve selected a few properties I like, then, I will look at the bid/ask spread. If there is a big gap between buyers (green) and sellers (blue) then it’s worth bidding at a price higher than the highest buyer. A big spread means that buyers and sellers don’t really agree with each other while nobody is giving in!

I will keep my bid live for a week or so. Most of the times it will execute depending on liquidity. But sometimes, I will just buy from the lowest seller, especially if the property is trading at a discount and the spread is small.

Tip: Bidding does not reserve your funds. This means you can actually bid on multiple properties with a fixed sum of money and just wait for them to execute!

Latest property funding:

Final Thoughts

The returns have been OK in a tough environment for property. Although the global stock market hits all-time highs every year, I find comfort knowing that my property portfolio does not move in line with my stocks. This is what this bucket is for.

Diversification does not mean that all assets in your portfolio should do well. If this happens consistently then your portfolio is too concentrated. I like alternatives and want to have a more predictable passive income from rent too.

Lately, I’m flirting with the idea of development loans to boost my returns. Dev loans started about a year ago and can go tax-free in an ISA. Property Partner has started issuing more development loans recently, usually once a month. They have now started paying back investors as the old loans are now completing.

My only worry is that the loans are usually “second charge” meaning that the first charge in the case of default goes to the senior lender. However, the fact that the owner of the development company can provide a personal guarantee over the full value of the loan is very positive.

Therefore, I have just invested in my first development loan and will keep an eye on these opportunities. I should probably write a post explaining how development loans work.

How have your returns performed? Or what holds you back from investing?

As a reminder, if you want to support this blog consider signing up to Property Partner using my affiliate link. Helps me and the blog to keep going. Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!

In case you’re not aware of it yet, the Property Partner fee structure has just changed to mainly introduce an Assets Under Management (AUM) fee. This recent change will hit portfolios with less than £25,000 with an extra 1.2% fee per year. The portion above £25k will be charged a fee of 0.7% per year.

I was negatively surprised by this change and must admit was also disappointed by the way it was communicated. I recently published a video about the platform while being quite supportive of what they’re doing. The innovation behind something like this in the property technology sector is amazing. The ability to invest in multiple properties in different locations around the UK, with zero hassle and with a subset of what I’d normally need for a traditional BTL route are all remarkable advantages.

But at a cost. This cost was quite low until recently. Now the fees are going up and after talking to many existing investors I will try to answer the following question in more detail: Is Property Partner still worth it?

Last week, I had a chat with the new CEO (Warren Bath) and here are my thoughts after considering everything.

Things I don’t like about the new Property Partner fee structure

1. Pretty much the whole new fee structure for small portfolios (<£25k). It makes investing with Property Partner less attractive since higher fees eat into our performance (see how much in the later section).
2. The fact that it was communicated very poorly. It felt like there was no warning or any sign of it coming really. One day I just got an email that my investments are now charged 3x the previous fee. I didn’t sign up to this and certainly didn’t take it into account when making my property purchases the previous months.
3. The fact that there’s no (easy) exit strategy for those who recently invested based on the old terms.
4. Positioning Property Partner as an asset management company but not acting like one. Usually, funds have an AUM fee but don’t have an entry charge. That’s only happening in very few places. The general industry trend is a race to zero which is a big win for investors. Arguably, funds can do that because they deal with very large amounts of money. The economics of scale allows for better pricing which benefits investors pooling their money.

Things I like about the new fee structure

1. I no longer need to worry about Property Partner being a sustainable business. This was one of my biggest worries when investing with them as the 2% one-off fee and no fee for ongoing management was simply too good to be true for the work they put in.
2. Fees will probably come down from up here. There is the sourcing+vendor fee which is now 3% down from 3.5% and I would like to see the transaction fee promos becoming a permanent change. That’s ZERO transaction fee for portfolios >25k before an investment goes public and only 1% tx fee for the first week of investing.
3. The development loan fee structure remained unchanged. So basically, we can still enjoy the same benefits such as 10-11% returns inside an ISA for this type of investing.

Is Property Partner still worth it after the fee change?

I think this question is better answered with numbers. Numbers never lie. They’re the answer behind marketing techniques and fancy brochures. I like to dig deep and always do the math regardless of whether I’m choosing an investment platform or buying a box of poultry selection for my cat.

In Property Partner, we have 3 main fees to pay when investing in property equity. Equity means investing in houses/flats, not development loans. At the time of writing (21 July 2019):

• Account fee: £1.20 per month
• AUM fee: 1.2% per year up to £25,000, 0.7% above
• Transaction fee (one-off): Between 0-2%
  • New listings: Currently ZERO for premium clients (>£25k) when investing early, 1% for everyone in the first week, 2% otherwise.
  • Resale market: 1.5% (1% plus 0.5% stamp duty)

To better illustrate the numbers, I will demo 3 different portfolios. A portfolio worth £20,000, one at £100,000 and a smaller £2,000 one. Portfolios are being built incrementally which means that about half the time they invest in Premium deals and half the time they buy existing properties in the secondary (Resale) market.

A) Fees on a £20,000 portfolio

As expected, the income of our £20,000 portfolio will take a hit of the full 1.2% AUM fee because it’s under the £25,000 threshold. AUM fee: £240 per year. Account fee is always the same regardless of portfolio value, £1.20*12=£14.40 a year.

Now regarding transaction fees, I think it’s silly to think of them in annual terms. Property is a long-term asset and if you plan to invest you better think in 5-year+ terms. You wouldn’t buy a BTL and sell it in a year anyway. So I think it’s better to pick a, say, 5-year horizon and average out the one-off transaction fee over the years.

I won’t bother you with all the calculations. I built a simple Excel spreadsheet that shows the overall Property Partner fee and expected return based on your portfolio value and a holding period. Use File -> Make a Copy to get your own version or you won’t be able to edit mine. Here it is:

From what we see, a portfolio investing £20,000 would have to pay £304 per year, or percentage-wise, 1.52% over 5 years of investments. That’s quite high in my books, especially when compared to the previous fee of 0.25% per year for the same conditions. (0 AUM, 0 account fee, 1% or 1.5% tx fee one-off).

Total fees (p.a.): £304 (1.52%)

B) Fees on a £100,000 portfolio

Given the fixed account fee and the high percentage on smaller portfolios, things ought to look better for those willing to put more money down. Again, the maths prove the point as shown below:

Portfolio Value: £100,000
Term: 5 years
£50,000 invested in Primary deals (0% first week), £50,000 in the Secondary market (1.5%)

Total fees (p.a.): £1048 (1.05%)

As expected, the overall fee goes down the larger the sum. Again, here’s the link to my Google Drive calculator to add your own numbers. Use File -> Make a Copy to copy your own version, or you won’t be able to edit mine.

Looks like the best way to drop the fees is not only to invest more than £25,000 so that you take the benefit of a lower AUM fee (0.7%) but also to invest only in early-access Primary deals.

How would our £100k investor pay if investing only in primary deals using early-access?

The transaction fee is 0% for early-access primary deals. Now, will this last forever? I’d like this to be a permanent feature, rather than a long-term marketing discount. Especially given the dramatic increase in the existing fees. Things do not look that bad this way:

Total fees when investing £100k with 0% fee and only in primary deals: £839 (0.84%)

Despite the negativity in the air, bigger investors are still doing OK. In my opinion, a 0.84% annual charge is actually still reasonable for the work they put into finding deals, managing tenants and running the technology behind the secondary market. Even better, if the fees come from investments in below-market-value deals thanks to PP buying multiple units in bulk.

C) Fees on a £2,000 portfolio

If you’d rather invest a smaller sum such as £2,000 then the fees are much higher. For a typical £2,000 buying into the resale market, you’d pay £44 a year, or in percentage terms 2.22%.

Therefore if you make a 7% return on your investment, that’ll drop to 4.78%. So investing £2,000 will return £140, £44 of which you’ll pay in fees. As you will also find out in my conclusion below, Property Partner is no longer worth it for smaller investors.

My thoughts on the company

Overall, I don’t think Property Partner is an evil company that wants to extract as much profit as possible from investors. I believe they’re either going to become sustainable/profitable or keep relying on cash injections from their investors (such as Octopus Ventures). But investors want to see results or the investment tap will eventually close.

Therefore, I can understand why they’re doing this fee restructuring. I mean… I guess It’s either this or they close shop (<- my words, my opinion). And I wouldn’t vote for the latter.

From what I believe, they have been taking shortcuts to tackle the profitability problem in the past. But property is a long-term asset and needs to be managed like one.

Providing this easy-access, zero hassle way to invest in a diversified UK portfolio has its costs and they need to make sure they’re making enough money to run a decent business. I guess anyone has the option to follow the traditional buy-to-let route instead, with whatever that entails.

Personally, I have invested almost £20,000 so far and I’m not pulling out. I will stay invested and see how my properties perform. As a typical passive investor, this goes against my “Avoid high fees at all costs” rule but I’m happy to pay for diversification against my main stock/bond portfolio as long as my northern properties are performing well (I’ll draft an update post at some point).

At a glance, my dividend yield (before AUM fee) currently stands at 4.86% and my total portfolio value is £19,810 with total deposits of £19,000. It’s quite hard to compute my annualised performance since I have been investing for about a year but not everything invested at once at the beginning. In fact, most of my investments came after testing the waters first. Therefore I need to do some more digging in the data before publishing my yearly performance.

If I had much more money invested in Property Partner, this change would do less damage but it is what it is right now. If something, this is a lesson when investing. I hate to repeat the classic “don’t put all your eggs in one basket” but in times like this, different baskets gives us options. And this is what the classic quote is all about.

Fees were introduced in a very poor manner

This is what made me angry. The way Property Partner introduced fees felt really bad. Sure you had in your terms and conditions that an AUM fee can be charged per SPV but when I invest I usually want to know the facts upfront. I want to see it coming. I want a way out. Or a warning about the intentions of such a move. Not a 20-day notice.

Otherwise, why trust that the AUM fee will remain between 0.7-1.2% from now on, and not climb up to 2% in a year’s time? Charging an AUM fee is in the terms and conditions, after all…

More importantly, I’d like Property Partner to honour the initial conditions of the past deals instead of applying fees in retrospect. A much better way of collecting higher fees is to only apply them to new listings moving forward rather than apply them to existing deals.

After all, Property Partner has tripled the size of its property portfolio since the EU referendum. So if it now grows from £140m to a much larger AUM base, this will ensure profitability while also preserving trust…

I’m sure some investors want out now. But can they really exit? Properties are not sold until the 5-year exit mechanism kicks in and the resale market needs a buyer for every seller. If everyone wants to sell at once… you see where I’m going with this. It’ll have to be a very good deal for the buyer to buy what others are selling, therefore the only way to exit is to sell at a very big discount.

If you’re amongst the angry people who want out immediately, you may want to wait a bit for the storm to pass, rather than making someone else richer. Some buyers may end up being very well off after the fees, so it may even worth placing some buy bids and monitor the massive discounts currently going on. There are some great opportunities right now due to investors behaving emotionally. Investing is usually 50% psychology + 50% finance.

But what are the alternatives?

I wrote an article more than a year ago – How Foxy Monkey invests in this overvalued stock market. History shows we’re running one of the longest bull markets ever. Despite the maths saying I may be better owning 100% stocks in a low-cost global index such as the FTSE Global All-Cap, I’m happy to allocate some of my money elsewhere and earn less in order to sleep better at night.

What else is out there? Does anyone own bonds, nowadays? I do, and mostly because I want to sleep better at night and have an “opportunistic pot” available at different times. But bonds offer a very low return, even less than inflation in most cases. This is not where I look for my long-term growth.

Peer-to-peer lending rates have dropped and I still see this asset class as a high-yield/junk bond. Therefore I’m not happy to allocate more than 5% of my net worth there. I also don’t buy the argument I’m selling Property partner because rates in peer-to-peer lending are higher. Rates in Burgundy wine are even higher but you’re comparing apples to oranges.

So overall, even though Property Partner fees have gone up, I will keep my portfolio intact and keep receiving the rent and hopefully capital growth when properties sell. Rent from residential property is not as volatile as shares are and tenants won’t move out of their homes to go live in a tent when the market declines.

Property Partner Fee Change: Bottom line

Do I support the fees going up? Absolutely not. Fees are an investor’s enemy. Investors should aim for low fees as much as possible.

If you want to test the waters in Property Partner with £1,000 or £2,000 that’s fine but just bear in mind you will pay very high fees for doing so. Property partner is now only viable for large portfolios as high fees for smaller investors will eat into your performance pretty quickly. But I think there is a case for above £50k investments in Property Partner. 4 reasons:

1. The fees come down above £25,000, therefore, the combined average fee is around 1%
2. Property partner offers good diversification benefits to stock market investments
3. Development loans are not affected by the new fees (even for small investors)
4. It may be cheaper than DIY BTL

Applying the fees to existing properties in retrospect, with no easy way out was a very poor execution of the plan, in my view. But I will continue to hold my ~£20k portfolio as a diversification strategy to my other investments. What about you?

Disclaimer: This is not financial advice just my own research and what I do. I have not considered your personal circumstances. As always, seek professional advice and do your own research.

If you’ve been reading Foxy Monkey for a while, you must have noticed that I’m quite keen on this new way of investing in property. I think property can be one of the best investments if done right. The clear advantages that Property Partner has brought to common investors like myself have inspired me to share my experience on the blog and openly talk about my property investments.

Rob and the team were happy to have me at their offices for a short chat. One of the topics I really wanted to cover was TRUST. Trust is super important when investing.

As I’m slowly building my target allocation of £50,000 in British property, I want to make sure that Property Partner is a legitimate company with measures in place that I can commit to.

I keep reminding myself:
Rule #1: Don’t lose money
Rule #2: Don’t forget rule #1

If I’m investing £100-200 then maybe it doesn’t matter. But as I, (and I know some of you), invest some serious money on the platform lately, trusting a company is of ultimate importance.

Of course, there are other things we touched on with Rob, such as:

• Why invest with Property Partner when you can do it yourself?
• Portfolio building for long-term wealth
• Investment plans vs Property Picking
• Brexit
• London in the next 5 years
• REITs vs Property Partner
• Efficient market hypothesis in Property

Oh, and why Foxy Monkey is the most boring investor of all times :) The video is 35-mins long and it’s sliced in 7 chapters for easy digestion. I have not been paid to do this interview. Enjoy!!!

Update (15 July ’19): Since the publication of this post, the Property Partner fee structure has changed. Investors are now also charged an assets under management fee (AUM) the structure of which you can find here.

This interview wouldn’t have been possible without the massive help of another person from Property Partner – Faraj Jabbour. Thanks so much, Faraj, working with you makes things so much easier.

Video Transcript:

1. Why Property Partner?

Michael: Hi, this is Michael from Foxy Monkey and today I’m with Rob Weaver from Property Partner. Thank you, Rob, for inviting me.

Rob: Pleasure!

Michael: Rob is the Chief Investment Officer at Property Partner and I’d like to ask a few questions about Property Partner and the work that you do here. I see a lot of interest in the platform.

For those that don’t know, Property Partner is a property crowdfunding web platform. It allows investors to invest in property in a hassle-free way. Foxy Monkey is a personal finance website focusing on investing, lifehacking and basically passive income generation.

The goal is to become financially independent. To have enough passive income that will eventually cover your living costs which makes you financially free. Rob, why don’t you tell us a little bit about what Property Partner is and your role here.

Rob: Property Partner essentially is a crowdfunding platform. We invest in property. Originally, it was residential property, we’ve migrated to Purpose Built Student Accommodation (PBSA). We’ve been going 4 years and have a good track record.

Started with our very first property in Croydon and we’ve grown in size. We moved up to buying blocks of flats and blocks of student accommodation. We’ve got longevity and a portfolio of £135m and vary every time we put a property on the platform.

Is it better to invest in Buy-to-Let myself or via Property Partner?

Michael: That’s great! I’ve certainly seen a lot of interest in the platform. You’re the guy who’s behind all important acquisitions and negotiations, right?

Rob: Pretty much, yes. That’s my day job and it’s what I’ve been doing all my career. That’s what sets you apart from doing it by yourself. Doing Buy To Let by yourself means you’ve got to learn the market and might not necessarily get the best deals in the market. Generally, with buy-to-let people invest in their local area. They can’t get exposure to the rest of the UK.

Makes it difficult to buy in Newcastle, or Sheffield and take advantage of the Northern Powerhouse. So we cover the UK. But also, as an individual, you can only buy 1 or 2 properties. So all your risk is concentrated in these 2 properties. And yes, things can go wrong.

What’s more, they’re also putting a big piece of debt on it as well, borrowing 70-75%. You’re taking a high concentrated risk and then amplifying it further through the mortgage. In my mind, that’s quite scary. I wouldn’t necessarily do it that way.

Speaking of tax, the rent interest offset is ending soon, so now, traditional buy-to-let is going to generate very little income, if at all. Some people who’ve already bought in, they might find themselves in negative income. But those who buy through a corporate structure may still do that (offset the rental income against the mortgage). So basically the Property Partner advantages are:

• Regional diversification
• Buy a small piece of each property, but many pieces
• Buy into properties that otherwise you wouldn’t be able to buy on your own (£3m student block)

You can always invest in REITs but you get to buy into all the properties, whereas here you get to choose. You want to invest in the York market, then you can do that.

And the final piece, which is the holy grail in the property market is liquidity. It takes a very long time to transact in property. Through Property Partner you buy shares in a vehicle and those shares trade. We’re seeing £1m a month trading on the platform.

Michael: It’s a lot of money. This was one of the main advantages I saw when I started investing with Property Partner – liquidity and the secondary market. Because when you invest in property it may take months for you to take your capital growth back.

Yeah, you may get the rent every month, but capital growth can only be realised when the property is sold.

Rob: But also, it’s a risky time, because you usually need to remove the tenant before you can sell it. Then you have the risk of vandalism. I’ve seen some dreadful cases where people are caught in nicking the radiators and the hot tanks and have to turn the water off!

2. Can I trust Property Partner?

Michael: Where I want to focus on is trust. Because trust is very important when investing. I may be investing some money in Property Partner but I want to make sure that Property PArtner will not close shop and leave. And I want to make sure that my investments will last, that the company will last. Talk to us how Property Partner ensures that my money is safe.

Rob: Ok, sure. We’re buying property, we’re not buying other things. It is in a very well established legal framework. All property transactions report to the Land Registry.

The way we’ve structured it is this. You can only have four names in the Land Registry. So we’re buying in a company structure which is on the platform. It’s a Special Purpose Vehicle (SPV) and that will be the only entity of the property. So that will be actually at Land Records.

You can actually do a satellite view on Google Maps or a Street View and see the actual property that you’re buying. It’s there, it’s not a hole in the ground. It’s a genuine property and you can drive past it yourself if you’re nearby. That’s the entity along with the Land Registry records.

Example property: 1, 2, 5 & 6 The Warehouse, Volunteer Street, Chester, CH1 1AF

Now on the safety side, the SPVs are separate entities from Property Partner. At the dreadful event of us going bust, for example, the property is there, with its ownership and a separate ownership structure. It’s up to the practitioner who will come in and look to do what he needs to do at that stage.

We have a contingency plan where we have put money aside if that happens, so that’s a nice safety net. But rest assured, the properties have separate ownership, we have no control over it. We cannot borrow money and go buy a racehorse for example. The properties are there and are real tangible assets.

Michael: Is Property Partner FCA regulated?

Rob: Yes, Property Partner is regulated by the Financial Conduct Authority (FCA).

Same with the trading platform. It’s called a Multi-level trading facility, regulated by the FCA. It’s literally one level down from a full exchange like a stock exchange. This place is a huge regulatory compliance office. We have to do daily reporting on trades. We’re able to do shorting and spread betting, which we don’t do, but we’re able to do that.

Michael: Ok, that’s interesting to hear. Because trust is really important, especially if I want to put some serious money. Maybe if I put £100, £200 that’s ok. But if I want to put some serious money, a big chunk of my net worth into property, I want to make sure that if I don’t go via the traditional buy-to-let route then my money is safe.

Rob: Absolutely. I get nervous when I’m buying a lampshade on the internet, whether the lampshade will turn up.

Michael: Which is why I’m doing this interview at Property Partner, actually!

Rob: Exactly. This is a different money. This is your long-term money, the high-value money to you. It’s got to be the safest deployment. And that’s why we treat it as such. That’s why you can actually look at the property, you know what you’re investing in and it’s legally allocated to that entity. You can’t get much better than that.

Michael: That definitely covers me. I’m glad that you guys are also very transparent about it. So when you didn’t know about me, having a blog and having an online presence, there were a lot of people who helped me. Such as Kyle, Faraj, to understand more about the platform. I actually even came and visited you just to make sure this company is real, haha!

Rob: Yeah, we do have an open office policy as well. You can come and visit us anytime. Because it’s nice and reassuring. There’s an office and there are real people there.

Rob Weaver’s Expertise at Selecting Properties

Michael: The reason I wanted to interview Rob is that he’s an expert in buying and selling properties. Why don’t you tell us a little bit about that?

Rob: I’ve given up a long career to come and work here. I was really attracted to the liquidity and the diversification. That got me out of the Royal Bank of Scotland and the sort of big institutional jobs all my career and I’m now doing that.

I’m a specialist in buying a certain type of property. I don’t do commercials, for example, I only do residentials. These are the markets I know and I’ve got contacts in them. And I’m actually buying properties that a buy-to-let investor cannot buy, usually the entire block.

I’m actually buying properties that a buy-to-let investor cannot buy

Robert Weaver, Property Partner

The advantage of buying the entire block is that:

1. I control the freehold
2. I control the service charge
3. There is no ground rent
4. I’m buying at a discount

Instead of buying one flat at say, £200,000, I’m buying 10 of them at £180,000 each. So it’s a better deal all around. As I said, we have contacts in the market. We know what we’re looking for and how to negotiate. This is our job.

Michael: Right, because myself, as a software engineer, I’m not an expert in property. Obviously I’ve read a lot out of interest but I’m not as good as a professional would be. So I think it’s important to let the professionals do their job. But at the end of the day, as an investor, you have to take the risk. It’s your final call.

Rob: It is, yes exactly. But not quite, because although I might choose that property, ultimately we put it on the platform and you don’t have to invest.

Is the Property Partner fee reasonable?

Michael: Reminds me of active vs passive funds that we have in the stock’s world. And usually people say, you should always invest in active funds that there are a manager and active decisions behind the investments. Let the professionals do their job. But actually, it all comes down to fees.

Yeah, sure, I want to let the professionals do the work but it comes down to fees. The reason I invest with Property Partner is that unlike active management, it has a very good fee structure for property. If I remember right, premium investors have some benefits, like 0% or 1% fee. But even a non-premium investor can invest with a 2% one-off fee per property.

This means that if I hold the property for 5 years that comes down to 0.40% per year. Which is something I’m willing to accept for all the work that you do.

Rob: I know. The other point I wanted to add, is that once we negotiate a deal, that’s the deal that goes on the platform. We don’t take a part of that. Take the Golden Hill Fort for example – cracking deal – that goes on with the price we negotiated. That’s the contract price and that’s what goes on the platform. There’s no creaming off haha!

3. Portfolio Building For Long-term Wealth

Michael: I wanted to talk to you about portfolio building and long-term wealth. I know you have two sides, one which is the equity side where you purchase properties and rent them out, and the other side which is the development loans.

That’s me lending my money and Property Partner in partnership with a 3rd party lending my money to a developer. The developer then pays Property Partner back and its investors.

Rob: They are two very different pieces. With the equity, you only own the property with leverage. You benefit from the up and the down of the value. Whereas with debt, it’s a loan – so you get a coupon, a rate of interest. So if the value of the asset moves up and down you don’t benefit from that.

So in a way, in a rising market, you’re not going to get gains and in a defensive market, you’re not going to have losses. Unless it’s a wipe-out in which case it’s a total loss. It is a risk. And there’s a risk chain.

Rob: 1st charge, lower risk. Then you have the mezzanine loan, the 2nd charge and at the very top the equity piece which carries the highest risk, that’s the first loss. I think you were asking me what’s better or worse, property equity or loans.

But you can’t see it as that. You’re getting a higher return for your risk. Now is the level of return commensurate for the level of risk? It’s not better or worse than the first charge, because you’re getting a higher return they’re getting a lower return, but they’re safer.

Michael: Yeah, I guess the question is: Is your risk-adjusted return better which is the million-dollar question I guess! This is what we have to do as investors and assess the opportunity and say: Yes, this sounds like a good deal, I’ve done my due diligence, I’ve read the papers etc.

I see you disclose a lot about properties before asking investors for money.

Rob: Take the mezzanine loans, the 2nd charge loans. We offer an innovative IF-ISA. Take one loan that is delivering 11% returns over 12 months or 15 months. That’s 11% tax-free because it’s in an ISA. Therefore, if I were at a high tax rate I’d have to be earning 20-odd% (to make an equivalent 11% net).

Where can i generate 20% in a non really-risky environment to get that level of return? So in a way, yes I’m happy to invest in that.

Michael: ISA is a tricky one, actually. You can only invest up to £20,000 a yea. By investing in an IF-ISA you’re sacrificing some of it, there’s an opportunity cost involved. You’re not investing in something else in order to invest in a development loan. So it has to be a good deal for you to get into.

Rob: Yes, exactly. If you’re getting 10-11% return, then yes.

4. Brexit and Property

Michael: Shall we talk about the elephant in the room? Brexit? I know a lot of people are worried and are scared of investing. I actually know some people from outside the UK that have contacted me on Foxy Monkey and said “I want to invest in Property Partner”. Because I know you allow European investors on the platform as well.

These people have told me “I’ll wait and see how this Brexit thing plays out and then I will invest”. What’s your view on that? What’s the impact so far and in the future of Brexit?

Rob: There are two areas and two markets I know best. Residential property and student accommodation. They’re very different. The residential market is slow right now. As a consequence, capital growth has slowed and it’s a very difficult call to actually know where the market is gonna go.

Suffice to say, that we’re still an island, we’re short of property and the population is growing. So you know there will always be a supply and demand issue. But there are periods of uncertainty and Brexit is one of them. Capital growth has slowed and we see less interest in residential accommodation whereas phenomenal interest in our loan bonds.

That’s because it’s an interest and you’re taking away all the exposure in the residential market. It’s the same asset class, different purpose. It’s a loan and you’re getting interest and have no exposure to the capital movement of it. So you de-risk any price drop by doing that but you’re going to miss out on price rise.

Conversely, student accommodation is an institutional market. Institutions are looking for long-term planning and income. Student accommodation has been a very resilient asset class. It’s been through the global financial crisis with a very little drop.

It has really big curveballs thrown at it: Tuition fees should have a massive impact but no impact no value going through the long term records. So it’s a very resilient defensive asset class and it’s delivering what looks like a strong income. Again when you look at the risk-adjusted returns, compared to commercial which is 3.5 – 4%, student is 5-6%.

You’re investing in university which is delivering good, acceptable levels of income. We see a strong interest by institutions and a lot of consolidation which has resulted in yield compression. Brexit had very little impact on that particular market.

Great tax treatment on student accommodation for limited companies

Michael: From a tax perspective, it’s quite lucrative for myself and others to invest as a limited company. That’s because Property Partner pays the rent as dividends. This means if you invest as a company, then the dividends are tax-exempt because of double taxation.

I know tax is boring, but I’ve written a long piece on how taxes work on Property Partner. What matters is your after tax returns. And if you can find a nice way of doing that, like through an LTD then it’s a win-win.

Where do you see London property in the next 5 years?

To continue on the Brexit and London side, obviously, London is not growing as fast as the rest of the UK right now. London is a market of its own, isn’t it? Where do you see London in the next 5 years? I know some properties on PP Are trading at -15% discount.

Rob: We try to stay away from prime London. We acquired with a capital growth theme in mind, which is Crossrail, a major infrastructure adding value. We acquired those in 2015 throughout the year and have bought others since then. So they had the benefit of capital growth but that has eased off. House pricing have since to show 4% maybe even less.

Another of those we’ve actually sold and returned the cash. We think maybe they won’t that much higher and where they had a discount we said let’s prove the value and return the cash to investors. We’ve done that in 3 examples already.

But regarding prime London – Chelsea, Mayfair, Battersea – it’s a very difficult one. It’s a market I don’t know personally very well, it’s very high end, big money. It’s a very niche sector.

Michael: You’re trying to stay away from prime London.

Rob: Absolutely. We’ve always been middle-market. So if the market is declining, people from the high end will come through and if the market is growing people from the bottom will come up through. It’s the middle transition point. That’s where we’re trying to be.

But I’ve always been amazed by how resilient London can be in my career. I couldn’t understand why values have been growing so much until somebody at a conference came to me and said: London is the capital city of the world. When you look at it from that perspective, you take away the local market and it’s where international money are looking to invest.

Michael: I think a lot of people just invest in London because they know it’s a market they will not lose. It’s not only about wealth grow, it’s about preserving your wealth. When very rich people invest in London, that’s what they care about. They care about investing somewhere they know their money is safe but they’re not losing.

Rob: The very prime London is very bizarre, it’s where the uber-rich invest. And they’re quite insulated from the recession as they’re so cash-positive.

I think we just have to get through Brexit one way or the other. To be honest, it’s not knowing that it’s the most damaging bit.

A bad decision would be better than no decision.

Price vs Value

Michael: Speaking of assets and pricing, investing is a funny one. They say there are no good or bad stocks. Any stocks is good at the right price. It’s the same with London I guess. I may look like a fool if I’m purchasing London right now, but what if I’m buying London at 20% or 30% discount?

Then 5 years down the line it plays out well. So I think it’s finding the right price for the asset and not just buying Manchester because it’s Manchester right now.

Rob: I agree. We had a property in Eastbourne and a property in Newcastle or Manchester on our platform. One was showing a high yield. I was talking to investors and said “oh it’s definitely that one”. They were like, “no not necessarily because that’s in a really core location in the central business district in Manchester so it should be a low yield.”

What we’re doing is that we’re offering different levels of discount for the property. So we’ve adjusted that out. When you’re getting the different yields, the properties are equally good.

5. Should I Invest in REITs or Property Partner?

Michael: I’d like you to talk to me about Real Estate Investment Trusts (REITs) and how they compare to Property Partner. I invest in Property Partner but I also invest in stocks and funds. REITs are real estate investment trusts which invest mainly commercially. How do they compare to Property Partner? Is it better to buy an investment plan in Property Partner instead of investing in a REIT?

Rob: There are not many REITs to invest in to start with. There are some, like British Land which specialises in offices, Regional & Capital more industrial and moving to shopping centres, etc. On the residential side, there are a couple of specialist ones which are quite small. On the student side, there is one called Empiric.

The difference is, REITs are totally taxed transparent, money comes in comes out without much taxation. But you’re buying into a fund and the fund manager’s expertise. It’s a big conglomerate.

The difference with property partner is that we don’t have the tax benefits, but you get to choose which property you want to invest in. There’s also PAIFs, the Property Authorised Investment Fund which is the property version of a trust. They’re also tax-transparent. REITs are closed-ended and the PAIFs are open-ended vehicles. The residential REIT choice is limited. Commercial, no problem at all.

6. Should I pick my own properties or use an investment plan?

Michael: Speaking of investment plans, this is a way for an individual to invest in Property Partner without having to pick individual properties. It’s like, I give you the money and you make the investment selection for me (minimum of £1,000).

You invest my money the same way that other people invest in the platform, in the sense that there’s no bigger bonus. It’s just that you’re buying into the expertise of someone at property partner.

Rob: Yes and no. It’s not an individual that goes and selects the properties for you. It’s an algorithm that’s written by Property Partner based on a certain number of facts. Such as the biggest discount to trading value, income, growth, and so on. You can choose based on different parameters and that will deploy the lump quickly.

Investment plans is property investing made more simple.

Rob Weaver

We have quite a few SPVs now, I think 120 to choose from. That’s quite a tall order, there’s a lot of choices there which makes it slightly harder but that’s what we do. Investment plans are an easier, quicker way to deploy a large lump.

Michael: Right, it saves time, it may provide better results as well. I want to compete with myself hehe. I was thinking of splitting my portfolio in 2. One in investment plans and one using my own selection.

Rob: Haha! I’m a property person so if I’m picking properties I’ll pick them myself. But yes, it’s whatever your preference is.

7. Is the Property Market Efficient?

Michael: When we invest in stocks, bonds, funds, we have this theory the efficient market hypothesis. It says that every bit of information is incorporated in the price of an asset. So if I’m buying the TSLA stock at $180 a share, all the public information is priced in.

So I’m not gaining or losing much (alpha) right now if I buy this individual stock right now. I was wondering how this compares to property. If I’m buying a property at let’s say, £300k, is there some value that I can extract as an individual or is the market so efficient.

Rob: The market is efficient. But it’s not totally efficient because it’s not a transparent market. It’s not a totally liquid market. That hypothesis works with liquid markets such as stock exchanges and tradeable shares where large volumes are traded.

Property is very different. It’s lumpy and it can take 6 months to transact. Also, there are other things going on and one of the biggest attractions of residential property is the nature of it. It’s made up by owner-occupiers who don’t behave the same way as commercial institutions.

When you get value falls, owner-occupiers won’t say “Alright, I’m moving out of this sector and going to live in a bond”. You just don’t do that. It’s your home and it’s your home for life.

Even if you’re selling you’re going to buy another home so it’s trading within that. If the value goes down by a long way, like in the Global Financial Crisis – up to 20% in the residential market – a lot of people may find themselves in negative equity. They are not sellers.

So what happens, is that the supply reduces massively and the supply and demand dynamics kick in. For example, in 2008 the residential market declined by 20% peak to trough, whereas the commercial was nearly 50%. That’s because as a fund manager I need to act on the behalf of my investors, sell and get out. Or close an open-ended fund after a big run on redemptions.

That’s what happens. But commercials come back up again. It’s very volatile, that’s why residentials are the least volatile markets of all the asset classes while good performing over the long term.

Michael: If I’ve seen something in London, it is what’s called sticky selling. Where the price doesn’t really go down because no one sells and there are not enough properties in the market. The price doesn’t drop because no one wants to sell which is why the price is called sticky.

Rob: But it’s where my job comes in to spot the opportunity and negotiate a discount. That is what I call proper pricing. For example, on our platform, there is an interesting property called Golden Fort. This is a Grade I listed “monument”, it’s a fantastic fort on the Isle of Wight.

The receivers don’t have much knowledge of the property because they hadn’t developed it and they had to take control. They’d sell it ‘as seen’, no warranties or anything like that with it. We basically bought if for £2.7m with the value of the property at £5m. So a very very big discount.

That was the right price to pay, bearing in mind the risk taking on. There was the uncertainty of the planning, there’ve been earth collapses, Isle of Wight subsidence. That’s a minor – I know that Victorian people building forts would overspec it. It’s like a siege. And they’d know where to put it, away from the subsidence.

The inherent knowledge that fundamentally is ok eradicated all these risks with planning and subsidence. I had a nice walk over the perimeter at the night before we exchanged. Also, I spoke to specialist insurance to make sure we’re not in an area of subsidence (we weren’t). We spoke to the manager and we tracked down the contractor.

It’s spotting these things, the knowledge of knowing that this property is sound but I will get a very good price on it.

Michael: Indeed. And investors took it very very well. Usually, when I go to property partner I like to sort by discount and get the best value. The Golden Fort was the last one, meaning it had the highest premium out of hundreds of properties!

Rob: And another one. We have an opportunity fund which sits in cash, and when the right opportunity comes that needs cash to purchase, we act quickly and do it. So we saw a student block selling at auction. That’s odd, that’s the wrong place for it.

Failed to sell on the day, I know I wasn’t surprised by that, so we were able to pick up the phone and we were able to sign the contract with a cash deposit straight away. We wanted to do it quickly, it actually took us 2 weeks but we were able to move on that one and get a great price. Once we established it and stabilized it, it would have a much bigger value.

It’s about spotting those opportunities – they don’t come every day but they’ll come.

Michael: In hindsight, I would have definitely bought in the fort but I didn’t. Well, it’s a risky one! Actually, a friend tells me I’m the most boring investor of all times because I just do boxes. Flats, not edgy, usually city centre, haha but I quite like that! I’m that type of investor :)

Rob: (Golden Hill Fort) is a solid investment. It’s solidly built, it’s got granite works at the stairs the most indestructible state you can come across! I love that one.

Michael: Well, Rob, thank you very much for spending the time with me today. I’m sure people will find it valuable, and I wish you best of luck to you and Property Partner. I’ll stay in touch and update people with my portfolio as well if anyone cares ;)

Rob: Haha, pleasure. Share the performance!

Disclaimer: This is not investment or financial advice. This is for general education only. I have not been paid to do this interview but I will receive compensation if you sign up to Property Partner using the affiliate links in this post. When investing, please seek professional help and as always, do your own research.

This post also shows how you can take advantage of the tax breaks we enjoy here in the UK. When I say that the UK is a tax haven people laugh at me. But between pension wrappers (SIPP), ISAs, junior ISAs, EIS & SEIS tax reliefs, capital gains and dividends allowances, you can legally avoid paying most of the taxes.

Property partner is my preferred way to invest in buy-to-lets and has done a great job so far. See my first Property partner post that explains how Property Partner works if you’re interested.

Whether you make a profit by selling property, collecting rent or development loans payments, you need to pay a tax on the profits. But don’t worry, we will soon see that it’s not that bad. The government actually tries to encourage saving and investing because it’s good behaviour. They won’t have to do the heavy lifting later on for us.

Property Partner makes it easy for us to report our taxes. They offer a tax breakdown document we can download for any time period as we will see later in the reporting section. Now let’s understand what kind of taxes we incur in the first place.

How Investments are structured in Property Partner

Property partner has structured its investments using SPV companies. SPV means “Special purpose vehicle”. In simple words, SPV means a company used for only one purpose. In our case, one SPV owns 100% of one property, and we, investors, own shares in the SPV. So if I own 10% SPV shares, it means I own 10% of the property.

SPVs are one of the most common ways to own a buy-to-let using your limited company. It’s clean and you get a mortgage easier than a trading company. That’s because a new company has no debt or other obligations for the lender to worry about. It’s one company for one property. Simple.

The tenants pay rent to our SPV and Property Partner distributes the rent in the form of dividends to investors. But rent only accounts for the first part of our total returns. If you invest in property, I’m sure you know that the most important gains can be made when the property goes up in value. In other words, when you sell.

Selling a property at Property Partner effectively means selling your shares in the SPV. Selling your shares at a higher price will generate Capital Gains which is what we pay tax on.

So if we bought a PP property for £10,000 and sold it later for £15,000, we’d have to pay a capital gains tax on the £5,000 profit. How much depends on your personal situation (and a big chunk of it could be zero!). Don’t worry, it’s not rocket science and the tax case studies below will help you understand it better.

The Three Tax Pillars Explained

All Property Partner income falls into 3 categories. It’s either in the form of dividends, interest or capital gains.

Rent – Dividends

All the rent you will ever receive from Property Partner properties is in the form of dividends. Because you own shares in the SPV that owns the property, PP pays you dividends each month. The dividend allowance for the 2019/20 tax year is £2,000. Anything higher than that is subject to dividend tax (7.5% or 32.5% or 38.1% – depending on whether you’re a basic, higher or additional rate taxpayer)

Selling property – Capital gains

You can either sell your property shares in the secondary market (to other investors) or Property Partner may sell the property for you as per the exit mechanism. Regardless of your exit strategy, selling a property at PP generates the same form of tax: Capital Gains, in short CGT.

For the 2019/20 tax year, the CGT allowance (HMRC) is £12,000 per tax year, per person. So if you sell a £10,000 property for £15,000 and make a £5,000 profit, you don’t have to pay any tax on it. Otherwise, the CGT is 10% (basic rate) or 20% (higher rate taxpayer).

Development loans (debt) – Interest

One of the most lucrative returns you can get in today’s low-interest environment is by investing in development loans. Property partner occasionally offers those products to investors.

The idea is that you give your money to a developer partner, they build houses and pay you back the interest when they’re done. For example, they recently raised funds to build a 3-bed house in Notting Hill, London and 12 houses in Salcombe, South Devon. Development loans typically offer a 10-11% net return per year and run for a fixed term, usually for a year, more or less.

Property partner offers an ISA for its development loans. So if you invest in these products inside your ISA all your future gains will be tax-free. Remember: you can hold more than one ISA as long as you don’t exceed the yearly allowance of £20,000. So you can have £10,000 in a Property Partner ISA and £10,000 in a Stocks and Shares ISA for example.

You can also transfer your existing ISAs into Property Partner.

If you invest in development loans outside an ISA you still get a personal savings allowance.

Source: Gov.UK

So between dividends allowance, capital gains allowance and ISA investments, one can theoretically invest tax-free 🙂

Let’s have a look at three typical examples.

• Alex, a full-time worker on a £30,000 salary.
• Jess, a full-time worker on a £60,000 salary
• Paul, a self-employed investing £100,000 through his limited company

Case study 1: Alex – A basic rate taxpayer

Alex, the civil engineer earns £30,000 per year from his full-time job. His other investments are all tax-sheltered, either in ISAs or in pensions. He heard of Property Partner from Foxy Monkey and decided to invest some of his savings.

Alex recently sold some London PP properties he bought in 2015. The properties were bought at £40,000 now worth £50,000 so he also just made a nice £10,000 profit from selling those. Right now, Alex’s portfolio looks like this:

• £30,000 in rental property producing a 5% net rental return
• £20,000 in development loans producing 11% net interest (inside an ISA)
• £10,000 profit from selling some 2015 London properties

Here’s how Alex’s portfolio will look like at the end of April 2020:

5% of £30,000 will produce a £1,500 in rental income. As we said above, rental income in Property Partner comes in the form of dividends. The dividend allowance for 2019/20 is £2,000 so that’s all covered by Alex’s allowance for the year. Tax on rent: 0.

Alex has invested £20,000 in some development loans and will earn 11% on it. That’s £2,200 in the form of interest. Since Alex’s investments are inside an ISA he doesn’t have to pay any tax on it. Tax on debt income:  £0.

Oh… the ISA beauty! £20,000 in an ISA doesn’t mean that Alex invested all the money in a single year on a £30k salary. He could’ve invested £5k every year for 4 years or transfer in an existing ISA. Had his investments were not ISA sheltered, he’d have to pay 20% tax on the gains, since he’s a basic rate taxpayer. 20% on £2,200 = £440. Ouch!

Alex also sold some properties on Property Partner from which he made a hefty £10,000 profit. The capital gains allowance for 2019/20 is £12,000 so his £10,000 profits are covered by the allowance. Neat. Tax on property sales: £0.

So excluding the tax Alex pays for his monthly salary, here’s what Alex will pay in taxes for his Property Partner investments:

Annual Property income: £13,700 (£1,500 rent +£2,200 loans +£10,000 property sale)
Tax on rent: £0
Tax on debt income:  £0
Tax on property sales: £0
—
Total property tax: Zero

Believe it or not, there is no tax to pay even though most of the profits came from non-sheltered investments.

Case Study 2: Jess – A higher rate taxpayer

Jess, the project manager earns £60,000 per year. That makes Jess a higher-rate taxpayer. To keep things simple, Jess also has her other investments tax-sheltered in ISAs and SIPPs and she receives no other income apart from her salary.

Jess also sold £50,000 worth of property in Property Partner for £65,000 so she made a £15,000 profit from the sale. Here’s Jess Property Partner portfolio:

• £60,000 equity earning her 5% rental income
• £20,000 in development loans earning 11% net interest, (£10k in an ISA, £10k outside)
• £15,000 profit from selling properties

Here’s how much tax Jess will have to pay:

£60,000 in property equity at 5% rental return will make Jess £3,000 per year in rents. Her dividend allowance is £2,000 so Jess will pay 32.5% dividend tax on the remaining £1,000 because she’s a higher rate taxpayer. Tax on rent: £325.

Jess has put £20,000 in development loans but only £10,000 are in an ISA. So she’ll have to pay income tax on the other £10,000. Because she’s a higher rate taxpayer, she will have to pay 40% tax on the taxable interest (not 20%). £10,000 at 11% = £1,100 profit. But don’t forget that £500 of it is covered by her personal savings allowance so Jess will pay 40% only on the remaining £600. That’s £240. Tax on debt income: £240.

Her £15,000 property sale is also taxable but only £3,000 of it since £12,000 is covered by her CGT yearly allowance. £3,000 at 20% capital gains tax rate is £600. Tax on property sales: £600.

Annual Property Income: £20,200 (£3,000 rent +£2,200 loans +15,000 property sale)
Tax on rent: £325
Tax on debt income: £240
Tax on property sales: £600
—
Total tax: £1,165

That’s not much tax (5.8%) given her total property income of £20,200. But as a higher rate taxpayer, you need to be careful after using up all your allowances.

Case Study 3: Paul, the self-employed

Personally, I invest in Property Partner as a limited company because I’m self-employed and most of my income stays in my company these days. It would be tax inefficient to take a high income from my company and then invest, so I invest pre-income-tax by investing through my limited company.

My aim is to have £50,000 invested in Property Partner through my Ltd. Let’s have a look at Paul.

Paul invests £100,000 through his limited company. Paul’s portfolio looks like this.

• £70,000 property equity at 5% net rental income
• £20,000 development loans at 11%
• £10,000 capital gain from a property sale

No diagram here, mainly because a Limited company has a simpler tax system compared to individuals. £70,000 at 5% will generate £3,500 per year. The company will have to pay corporation tax (CT) on the profits but here’s the main difference when investing as a limited company:

HMRC says that dividends should not be double-taxed.

Because dividends have already been taxed at the company distributing them (Property Partner’s SPV) the limited company will NOT have to pay tax on the dividends received. As a result, this means that all rent comes tax-free 🙂

This is awesome and it’s an added benefit when investing as an Ltd. So Paul’s company won’t pay any taxes on the £3,500 rent. Tax on rent: £0.

What about development loans? These are taxed as profits because they come in the form of interest. 11% of £20,000 = £2,200. The corporation is 19% for this tax year. Assuming the business does not have any expenses (which is highly unlikely), the tax will be 19% of £2,200 = £418. Tax on debt income: £418.

Unlike individuals’ allowances, capital gains are also liable to corporation tax. £10,000 at 19% = £1,900. Tax on property sale: £1,900.

Annual Property Income: £15,700 (£3,500 rent +£2,200 loans +10,000 property sale)
Tax on rent: £0
Tax on debt income: £418
Tax on property sales: £1,900
—
Total tax: £2,318

This tax may look high, but remember that’s on a total investment of £100,000. Plus you can easily add some business expenses to reduce your tax liability.

But don’t forget that investing as a business means that at some point you’ll have to eventually take the money out of the company to enjoy it personally. There is probably an additional tax to pay there, but it all depends on your personal income at that time.

For example, I plan to grow a lump sum in the limited company and only start withdrawing 5-10 years or more down the line when I take a year off work or become financially independent. Having no other salary when in FIRE will make regular withdrawals almost tax-free while also benefiting from being able to invest my company profits without incurring any income tax before investing.

Tip: To invest in Property partner as a company you will have to get a LEI code because… regulation. It’s a 15-min thing. Read how to get a LEI code and why.

How to pay lower taxes at Property Partner

By now you must be wondering. It’s good to know how taxes work at Property Partner, but I want to know HOW I can reduce them. Me too! So here I sum up everything you can do to reduce your tax bill when investing at Property Partner.

The best way to save on taxes is to invest in those property offers where you’re investing tax-free or low-tax. This is why it’s very important to know your allowances and use them.

1. Open an ISA for development loans

If you invest in development loans then, using your ISA is a no-brainer. This way all gains are tax-free. You can invest up to £20,000 each year and you can have more than one ISA as long as you don’t exceed the yearly allowance.

But the good news is that even if you don’t want to use your ISA, you’re getting a £1,000 personal savings allowance as a basic rate taxpayer, or £500 as a higher rate taxpayer. Sorry, 0 allowance for additional rate taxpayers. In other words, a basic rate taxpayer will get their first £10,000 (non-ISA) debt investments at 10% return tax-free. £5,000 for the higher rate ones.

The most painful tax is the one on development loans (interest) after having used your allowance. That’s because it’s taxed as an extra “salary”. So if you’re a basic rate taxpayer, 20% tax may not be that high but as a higher rate taxpayer (earning more than £50,000) then 40% tax IS too much. Which is why having the development loans inside an ISA is a great option!

2. Use your dividend allowance

Since Property Partner pays rent as dividends, we get a generous dividends allowance. £2,000 to be exact. That’s £2,000 on the gains, not on how much you have invested. By use your dividend allowance, what I mean really is, know about your dividend allowance.

So at a 5% net rental return per year, it’ll take £40,000 in property rental investments to use up your £2,000 yearly dividend allowance. (£2,000/5 = £400*100 = £40,000). At a 4% rental return that’s £50,000 of property you can own and receive tax-free rent each year!

If you’re a basic rate taxpayer, the property equity/rent is a good option since it’s taxed very low (7.5%) until you hit the higher rate tax threshold. After that, rent (dividends) will hit you with 32.5%. Compared to the 40% of debt products that’s the lesser of two evils. However, development loans offer much higher returns in a short time so the return compensates for the greater tax (but at a higher risk!).

Dividend tax rates over your allowance. Source: Gov.UK

3. Use a limited company if you’re self-employed or on a very high salary

If you’re investing in Property Partner through your limited company then it makes sense to invest in an income-heavy portfolio. That’s because you take full advantage of the double-taxation rule saying that rent (dividends) are already taxed at source (Property Partner) so you will NOT be taxed again in your company. Essentially, that makes rent collection tax-free.

Sure, that’s not to say the money is in your pocket since you will be taxed later on for withdrawing it out of your company. But as we already said, this makes you very flexible with withdrawals. Becoming financially independent puts your future self in a very low tax bracket 🙂

The cons of this method are that it requires a bit of extra hassle to set up a company and file yearly accounts but your accountant can do that if you’re keeping score. Let me know if you need one.

You will need ta LEI code to invest as a limited company at Property Partner (or in other places, really.)

4. Invest with your partner

If you have a partner, then you can split your investments to utilise both your allowances and ISAs. This is a no brainer as long as you trust each other obvs 😄

5. Tax-gain harvesting

This is a more advanced strategy that makes sense once you get more serious with tax optimisation at larger amounts. In short, the goal is to save us from getting hit by a big tax bill years from now, by making use of our allowances each year without having to exit our investments. Let me explain.

The capital gains allowance of £12,000 per year is lost if not used. It’s not unusual to have a few properties that go on for years until you decide you sell everything at once. However, that’s not a good strategy if I put my tax hat on.

So instead of realising your gains in 5 years time, you can realise your gains by selling your property shares once a year and then buy different properties. This way you “harvest” your gains by using your yearly allowance each year and start from a higher high every time. It’s a really clever idea that can save you thousands of ££ in future taxes.

Note: I believe selling and buying the same property does not qualify for the capital gains allowance in the eyes of HMRC. But there are plenty of properties at Property Partner and you can even find a similar one to suit your strategy. In fact, here’s ALL of them :)

Selling in the secondary market is free of charge. However, to buy in the secondary market you pay a one-off 1% fee plus 0.5% stamp duty. This makes the strategy less worthy but as a Premium investor, you enjoy some early-access new listings at 0% fee plus some cashback when buying in the secondary market. Which means that this strategy can work brilliantly if you’re investing larger sums.

I believe if you have a large portfolio it’s harder to do so in the secondary market due to low liquidity, but the liquidity is improving thanks to the cashback mechanism (PP call it resale market rebates).

So basically, if you’re an investor buying in the secondary market above £20k in a month, you get money back up to 6%. That’s when you either buy secondary shares or buy through bidding (what traders call a market maker). This makes tax-gain harvesting an even better strategy.

Tax-gain harvesting is a big advantage of Property partner versus traditional property, where it’s not so easy to sell your property and buy a similar one every year or so 🙂

6. Use the Premium Service of Property Partner

You need to invest £25,000 or more to qualify for the Premium service at Property Partner. The premium service has some advantages worth mentioning:

• Early-access to properties at a zero fee. This makes tax-gain harvesting a much better proposition now.
• A dedicated account manager. Once you tell them your goals they can provide some insights. They can even build an investment plan that’s tailored to your individual circumstances (tax considered, although they cannot provide any tax advice).
• Time horizon, goals, risk appetite and taxes are all important. Maybe you also have existing holdings outside of Property Partner so a dedicated account manager should be able to help here. Thanks to this blog, I’ve built a good relationship with Kyle, the person who manages the high net worth individuals. Let me know if you want an introduction (michael@foxymonkey.com).

7. Charity donations

Another way you can reduce your income is by donating to charity. You get tax relief on your donation if your charity is registered with HMRC through Gift Aid and most charities are. You can claim back the difference between the tax you’ve paid on the donation and what the charity got back.

How to report your Property Partner taxes

If after reading this article you’re screaming aaah that’s so complex I’ll never be able to do that, I get it! I don’t blame you. But the reason I wrote this article is to give you the benefit of knowing what you’ll have to pay and how to reduce it.

By understanding the process you can know whether you should invest more in development loans, for example, and what to expect on your tax bill. And between Property Partner reporting structure and perhaps an accountant once a year, this whole thing can become super simple and tax-efficient. Don’t make taxes put you off investing.

First of all, the good thing about Property Partner is that it already takes care of your tax calculations. So it offers a nice breakdown of how much capital gains, dividends and interest you have received. That’s perfect because it makes our life super easy at the end of each tax year. Here’s my February tax statement:

Although I selected an arbitrary month, you can always select the entire tax year period for your tax return. They can even show you a per-property income breakdown which is cool if you wanna see some big wins (or big losses!).

The easiest way to report your taxes is to get an accountant to prepare the self-assessment tax return for you. That should cost around £100-150. But you can start looking for an accountant when you reach the tax threshold for filing a return in the first place! Assuming you have no other income apart from your salary, and you invest as a Person (not a Business) here’s when you should start taking action:

Rent

If you earn up to £2,000 per year in rent (2019/20 dividend allowance) then you don’t need to do anything. From £2,000 to £10,000 rental income you just need to contact HMRC and tell them to adjust your tax code. If you do earn more than £10,000 in rent (dividends) each year then you need to file a self-assessment return, if you aren’t already.

Property Sale

As the image above shows, Property Partner does the heavy lifting for us by reporting the capital gains we have realised each tax year. They deduct fees and stamp duty costs which is great because only the net amount matters. If the capital gains amount is up to the CGT allowance, there’s nothing to do either. The CGT allowance for the 2019/20 tax year is £12,000.

If it’s more than that, you need to report it to HMRC either by using their real-time CGT service and paying straight away or by including it in your self-assessment annual report as usual.

Development Loans

If the development loans profits are inside an ISA, there’s nothing to do regardless of how much money you made.

If the interest you receive is £10,000 or more then you need to file a self-assessment report. You can calculate how much capital gains you should pay by following the HMRC CGT calculator which is VERY easy to use. It asks you a few questions and then it shows you the capital gains tax you should pay. For anything less than £10,000 I’d contact HMRC. They say that if you’re employed or getting a pension, HMRC will change your tax code so you pay the tax automatically.

If you do have other income that is not in ISAs or Pensions, then you should consider filing a self-assessment return. Always ask your accountant or a qualified person! That’s the best course of action when in doubt.

Final thoughts

Property Partner gives us a great way to invest in property while also taking advantage of tax allowances. We saw how taxes work at Property Partner and what UK taxpayers can do to reduce them.

Although taxes are very important, don’t stress too much about it. As Warren Buffett likes to say: The first rule is to never lose money and the second rule is to never forget rule no 1 :)

We first need to make money and then to shield it from tax as much as possible. This is why we diversify by investing in different locations and various asset classes to keep the boat steady.

Personally, I believe investing in Property Partner has allowed me to make money in a very stable way which is also backed by property. My personal returns are slightly higher than the advertised rate of 7.2%. I’m due for a property portfolio update post! But Property Partner is not the only way I invest. I have other investments in stocks and shares and a small allocation in bonds, cash and p2p lending.

Related articles:

• My Property Partner Experiment
• Best Passive Income Investments 2019
• How Foxy Monkey Invests

Disclaimer: The above is not tax advice and should not be considered as such. I’m not a qualified tax or financial advisor. Although I’ve written the tax article to the best of my knowledge, my thoughts can be wrong and you’re liable for any losses and for paying your taxes. As always, do your own research and seek professional advice.

Disclaimer 2: I have not been paid by Property Partner to write this article. However, this article contains affiliate links and I will get paid if you invest in Property Partner using my affiliate links.

Disclaimer 3: My wife prepared all the graphics of this post and I think she has actually done a great job for a hobbyist. If you want to work with her, let me know :)

I always wanted to own property as part of my investments. But I was always put off by the hassle that comes with it. Have a high deposit, submit lots of documents to get a mortgage, find tenants, a good estate agency, maintain the property, the high fees and taxes that come with buying/selling… And the list goes on.

Especially now (2018) that London properties have appreciated so much, I think there is little room for growth in the next 5 years ahead.

Areas like Manchester, Liverpool, Birmingham, aka The “Northern powerhouse”, are probably better positioned for capital growth and higher yields. Personally, I have the management problem. How do you remotely manage? And how do you choose a remote tradesperson/estate agent?

To be honest with you, I have not solved that problem but listening to what others say, you have to do the work and build a network of people. Post on property forums that you’re looking for certain skills. Call local agencies, visit occasionally etc. The final reward is there, but it’s a hassle, which is why I have avoided remote property investing so far.

However, I think technology is changing this. I recently started investing via Property Partner by buying a small share in properties there. They do all the work for a 2% fee – sourcing, letting, ongoing management, and you own shares in the property. They pay rent (dividends) monthly and pay the capital growth part as well if investors want to exit.

I find the concept interesting, and although it has many restrictions (you don’t decide how to furnish it, who the tenants are etc) I see lots of advantages too. For example, the option to invest 20% in 5 cities, instead of 1 property in a single city. Liquidity is another – the option to sell your properties anytime in the secondary market to other investors. And obviously avoiding all the buy/sell hassle which is why I didn’t invest in remote property in the first place.

I fully support the modernisation of investments through technology. The world moves on, so the archaic 2-month buy-to-let buying process should evolve too. Airbnb, RateSetter, Uber are just examples of old systems (hospitality, taxi hailing, loan matchmaking) that needed a disruption.

What is Property Partner and why I’m choosing it

In a nutshell, Property Partner is a platform where you can buy and sell shares of properties around the UK. They do the paperwork, find tenants, collect the rent and pay it out to investors. They also welcome investors from abroad.

So new deals come up that need funding such as this one:

As you can see this is a student accommodation of 56 units and seeks £1,929,100 in funding (51% LTV). So people can allocate money towards this deal. Once the fund target is met the property is bought.

The 6.2% on the right is the estimated net rent per year. The total return will probably be higher since we haven’t accounted for the (unknown) capital growth from the property appreciation over time. According to PP:

For the 12 months ending Sept 2017, CBRE’s PBSA valuation index showed a total return of 11.9%, outperforming the IPD All Property Index of 9.5% over the same period. It also demonstrated strong rental value growth at 4.1%.

But how do I know the property is worth that much? Turns out independent RICS valuations set the property price and Property Partner try to strike a deal below market value. Since they’re buying in bulk they can negotiate harder.

If you don’t want to DIY you can invest in their managed investment plans. At no extra cost, one can buy a certain characteristics portfolio monitored by PP if you invest a minimum of £5,000. But there is no minimum investment otherwise.

I’ll take up the challenge and try to beat the managed plans by investing solo. I’ll probably lose to the machines… and I won’t blame you if you decide to go for one of those plans. You’ll probably do better.

Do we really own the property?

A new special purpose vehicle (SPV) is formed for every deal that owns the property. According to how much each person invests, they own the equivalent shares in this company.

Therefore, we collectively own the property itself. But that doesn’t mean that we have to collectively make decisions for when to sell (coming up…).

The rent is paid in the form of dividends by the SPV which is why you see “dividend yield” instead of “rent”. If you, like me, are investing via a limited company, dividend payments are music to our ears. They’re tax-free :)

What I love about each deal, is that you can see a clear breakdown of the purchase price, rent, costs (mortgage, sourcing, management) including void periods and taxes. It’s quite transparent.

The first question that comes to mind is this: What if they don’t pay the rent? So I asked this question to the PP guys and here’s the response:

We’re experienced professional landlords, working with carefully chosen third party professional management firms and utilising economies of scale to further improve efficiency. To date we have not underpaid a dividend. If investors ask us for an individual property we can provide an answer as to how many units are let.

Faraj Jabbour, Property Partner

Obviously, you cannot know what will happen in the future but a solid track record is always a good sign.

I confirmed this by looking at the property stats which they openly share in their “Open House” publications. Looking at the one from June 2018, I can download the historic valuation and dividend yield BY PROPERTY!

This is a huge Excel file that for spreadsheet nerds like me is gold. You can plot trends, draw graphs but actually, most of this info can be found in every property online anyway. I highly appreciate the transparency though. If I am to invest serious money here, I’d like to have this sort of detail if need be.

My Property Partner Portfolio

Each person is different. What looks like a bargain to me may look like “bag holding” to someone else.

Before I invested there I asked myself: What do I invest for? High-income? Capital growth or a blend of the two? In such an ultra low interest-rate environment, high yield is amazing. Especially when knowing that Property Partner hasn’t missed out on any rent collection.

But most of the returns in property, historically, come from capital growth. In other words, rent is good, but property appreciation is what makes us the big money. If mortgaged, the gains (or losses!) are boosted.

However, because I chose to invest as a limited company (as opposed to an individual) the rent in the form of dividends is tax-free! Therefore it makes sense for my strategy to lean towards tax-free income while leaving some room for taxable capital growth as well. Let’s cut to the chase.

Whoah! What a Landlord eh? Better not tell the government!!

As you can see, I’ve split my investments between Manchester city centre, Greater Manchester, Sheffield, Warrington and Newcastle. I’m also bidding the rest £2,000 in Liverpool City Centre and Birmingham. And why not! London prices are dropping while midlands rise 6% in a year.

I believe with projects such as the HS2 and the regeneration that’s going on in the north, these are the areas that will greatly benefit. The government is making efforts to advance those cities.

Also, because of the fact that London has appreciated so much recently, these cities have lagged behind and have room to grow. This seems to be the opinion of property experts (hi Robs): Episode 240, Episode 164.

If I had to invest in property using a traditional mortgage, I’d probably need a lot more money to start with. I’d also lack the diversification of investing in 5 different cities.

I bought the Manchester property at an 8% discount to the latest valuation.  In the Resale market. Oh yeah… I forgot to mention the most important thing. The Resale market!

Buying and selling property in the Resale market

One of the reasons I decided to go with Property Partner is because I have the option to buy and sell already funded deals. This amazing feature allows me to bid on properties lower than their estimated value and immediately benefit from a below-market-value deal if other investors want to sell their holdings.

Additionally, I don’t have to wait until a Primary market deal comes up. I can sign-up and start investing immediately. I can also sell my investments to other investors early without having to wait the full 5-year period.

However, when trying this feature I found that the bid-ask spread is sometimes high. So existing sellers want to sell high and potential buyers to buy low which makes for a stagnant market. However, you can sort properties by the bid-ask spread and by discount in the Data View and then go for the ones that are selling at lower values AND have liquidity. That’s what I did!

Here’s how the Resale market looks like. Pretty much like any trading exchange.

So you know what the latest RICS valuation is, and you can bid well below that. There are properties that trade at a premium, and others that trade at discounts.

An awesome feature I “discovered” is that your money is not tied up when bidding for properties. That way, I can bid £1,000 for all 10 properties I want to buy at lower prices, without having to have £10,000 in cash. All I need is £1,000.

There’s an additional 0.5% stamp duty tax for buying shares in the Resale market. I don’t really care much about that because the discount rate will compensate me for buying in the Resale market.

Risks

What if Property Partner goes bust?
This is one of my worries. Similar to other platforms, I found they have a contingency plan. Of course, I wouldn’t want to see that take place.
But in the worst case, an alternative property manager is scheduled to take over. SPVs will be unaffected and investors will continue to own the properties as before. That’s because each property is ring-fenced from the assets and liabilities of Property Partner. See further info here.

What if people don’t pay the rent?
You simply don’t get paid. It’s, however, comforting to know that 5 years in the market they have never underpaid on dividends. I guess there is a lower risk in those multi-unit buildings.
The risk of voids diminishes as the number of units increases. This makes sense, as percentage-wise even a single void would be catastrophic in a 3-unit development but not so much in a 50-unit one.

Brexit drives house prices down & interest rates go up
With the Brexit madness at its peak, I’m surprised housing has proven so resilient as an asset class. But there’s always the risk that Brexit will drive prices down. If interest rates go up then mortgages will get more expensive which will eat up our returns.

Risk of buying mortgaged properties
This goes without saying, but if you leverage using a mortgage your gains as well as your losses are amplified. It goes both ways. However, I’m happy to take the risk since I’m a long term investor and on average property goes up.

Final words

I must admit that I learned all these by reading the vast knowledge base and exchanging emails with the Property Partner team. They were quite responsive and I was impressed they were answering all my questions in detail before I invested a single penny.

To me, that’s a good sign of a platform that respects customers. Another good sign is the excellent rating on TrustPilot. They’re also authorised and regulated by the FCA.

I told them I’m considering investing serious money and they invited me to one of their events. So I went and met part of the 20-people team along with other investors. Property Partner also support ISA investments for their development loans part. Faraj from the team was very helpful and knowledgeable. I mentioned Foxy Monkey and he gave me his contact details to pass on to those interested

faraj.jabbour@propertypartner.co

So overall first impression is very positive. Time will tell.

Initially, my passive investor instinct was shouting at me. 0.7% to 1.2% annual fee? Are you serious?

But then I thought that’s a bargain considering I benefit from their expertise, getting below market value deals by buying in bulk and diversifying in multiple cities. In fact, I’m quite happy with the pricing model for investors that want to put in more than £10,000. Plus there is no minimum investment amount.

Read my review on the Property Partner fee structure

My strategy going forward will be to buy good deals in the primary market. I saw that good primary deals can sell for 10% or higher in the resale market just after being re-listed. Of course, one can get good deals in the resale market, so I’m exploring low bidding there as well.

My plan is to write an update every 3-6 months and occasionally monitor my Property Partner portfolio. There are deals that come up such as new development loans (10%+) they recently started. So stay tuned!

By the way, Property Partner is currently offering a 2% bonus if you invest £10,000 or more. So a nice little £200 extra for me to invest :)

Disclaimer: This is not investment advice. There is risk involved in investing. As always, do your own research. Property Partner did not pay me to write this experiment. If you, however, become a client through my links then I will receive a reward at no extra cost to you (and thanks!). You can also do the same; they operate a “Refer a friend” scheme.