Buy-to-let share trading? Great idea, but...
By Damian Clarkson     28th September 2007

Those who fancy a crack at the buy-to-let (BTL) sector but lack the funds can now buy shares in rental property for as little as £1.

The Property Investment Market (TPIM) concept is a simple and seemingly attractive one: Buy a stake in a property, earn dividends off the rent, then sell when it's worth significantly more.

Add to that the fact you don't need to take on the added burden and risk of a mortgage, and it all starts sounding too good to be true. Which of course, it may very well be.

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free lunches
For starters, you incur a fee of up to 3% on transactions, which can take a massive chunk out of your profit. And with both residential and commercial property markets slowing sharply as the rate hikes take hold, those yields could be somewhat stunted from the get go.

And of course there's the issue of liquidity: You're reliant on the fact that another TPIM customer is willing to buy your shares off you, so there's a good chance you couldn't sell up exactly when you wanted. Add to that the fact TPIM is "still awaiting FSA approval” and the alarm bells should be ringing loud and clear.

And yet despite all this, the fledgling company is growing rapidly – taking on 20 new properties in the last six months – and boasts an investor base of nearly 5,000. So just what is it we're missing here?

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Here's what's on the marketing brochure
Talk of a housing market crash has proved repeatedly wide of the mark before, while many dips were short lived. The truth is nobody really knows what it will do next, meaning optimists who feel rental yields will soar have as much justification for their view as market pessimists.

As TPIM marketing director Christian Lennon points out, "people were predicting a housing market crash in 2001, 2003 and 2005, all of which were wrong.”

Looking at TPIM's portfolio, 70% of the properties it has bought so far are situated in the south east, which has traditionally seen some of the strongest house price growth over the years. And with tenancy demand high in these areas, you might expect properties will seldom be left vacant.

Another advantage is that the burden of stamp duty is significantly reduced. If you were to look to purchase a house through normal means, you could be forced to pay up to 4%, or £20,000) for a £500,000 property. But go through TPIM and you pay just 0.5% on the shares you buy – plus you aren't taxed again when selling up.

"If you were to pre-order £1000 (1000 x £1-shares) in a property whose offer price is £182,325 you will have paid £16.18 in Stamp duty, survey and legal costs,” explains TPIM. That's still less than 1%.

Finally, because the firm handles all the technical aspects, even the most novice investor can sign up.

"All properties are vetted by experts who consider whether they would invest themselves - if the answer is clearly no then the property is rejected there and then,” says TPIM. For those properties that pass the initial test, the Royal Institution of Chartered Surveyors then carries out an independent valuation and publishes it on its site.

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Here's what's not on the marketing brochure
OK that all sounds lovely, but let's just dissect these points and see what they really mean. First up: The portfolio. With nearly three quarters of the properties situated in one geographic area (admittedly it does have plans to expand this in the future), diversifying your risk could prove extremely difficult.

Next is the issue of trading your shares. The transaction fee – the share of profits TPIM takes – is 1%. And when you add tax your costs can work out to 3%, although Lennon says costs are 2.5% on average. Also, each property includes a contingency fund for repairs and unforeseen costs not covered by insurance, which comes from the rental income.

Considering the rental yield on TPIM's available properties is between 5% and 6.5%, you can't help but wonder if you're not just better off stashing it away in an fee free savings account offering 6.4%. At least then you can access your money whenever you want, and there's very little no risk.

Finally there's the fact that TPIM manages the account on behalf of investors. What that means is you have no control whatsoever– from which properties are bought, to how it is renovated or maintained.

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Some final points for consideration
Because TPIM is a new company, your opportunities to invest will be severely limited. At last count the company had 50 properties, but only 15 were available to invest in (and these presumably would be the least attractive ones).

A lot of the properties purchased are don so by a pre-order, whereby investors add their money to a pot until either enough money is raised or a specified time frame is exceeded and the money is returned. This of course raised concerns that your money could be locked away for a long time, but a TPIM spokesperson assured me this time frame is only six weeks on average. Not ideal, but not a travesty either.

Only time will tell
This is certainly an innovative concept, and TPIM should be applauded for that if nothing else.

And while Lennon is aware the company raised a few eyebrows in its early days, he says the growing number of investors, including both sophisticated and first timers, shows people are now coming around. The fact that the average amount invested has increased from £400 nine months ago to between £2,000 and £3,000 today would seem to back that up.

It's true that people will always treat new ideas with scepticism, but the fact TPIM isn't yet regulated by the FSA adds a hearty dose of fuel to that particular fire. If you do approach, make sure it's done with caution.

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Article produced by EveryInvestor.co.uk