Scam alert!

The impending renters reform legislation will strengthen the tenants’ hand and weaken landlords’ position.  Whether that’s good or bad, it’s a fact. 

Some property owners’ response is not to rent to individuals.  Instead, they are looking to rent to a commercial organisation and, in this respect, social housing is a good option.

The advantages for the landlord is no voids, no maintenance, no agency fees and no utility bills.  The downside is that you’ll need a commercial mortgage with higher interest rates.

Is it a valid strategy?  Absolutely – but only when you own the property, and you contract directly with the company that pays the bill.

So what’s the Scam?

There’s a thriving (?) new business doing the rounds in the property industry and I feel need to warn about it. 

There are a lot of enthusiastic commission-based salespeople pushing an ‘investment’.  The pitch is to invest a relatively small amount of money - £13K seems to be the amount most people are quoted (or multiples of that).  The investment is made on a 3-year, sometimes 5-year, loan with anything from 15-30% annual interest on your investment for duration of the loan term years – then you get your capital back.

What are you investing in?

The marketing message is that you’ll help to solve the housing shortage.  They claim to have government-backed contracts to house people – particularly vulnerable people.

They say ‘Invest your money for social good and get a return’.

The scam emerges when you want to know who ‘they’ are.  That’s not clear.  This ‘investment’ is, effectively, an unsecured loan to someone’s limited company.

The insidious part is that it is dressed up with some reality – but deliberately misrepresented.

The scam is that the company you are giving your money to doesn’t own the properties.  They may be leasing the properties from the owner, possibly on a rent-to-rent basis, then subletting to a company who has got a contract with the government or an agent of the government.  That makes a long chain for your money to disappear into.

Like any Ponzi scheme it starts off meeting its commitments – that’s how they suck people in.  These enthusiastic salespeople have almost certainly invested themselves and can legitimately say that they are getting their interest payments – for now.

But what happens if the company you’ve invested in folds during the next three or five years?  They don’t own any of the properties, they’re not actually backed by a government contract, there’s no way to reach their connections for leverage, there’s nobody to chase – in short, there’s no security.

What happens when it’s time to get your money back? 

There’s no way to know how many companies are running this scheme (scam).  They’ve sprung up out of nowhere and have no track record.  As an investor you have no control over where your money goes.

It sounds good, but it doesn’t really work in practice.  There’s only one way this ends – people lose money.  It’s not a good investment.

One of the prominent people I know, who is doing this kind of commercial letting the proper way, reports that there are currently rumours that one of these companies has already gone bust.

What’s the ‘hook’ to attract investment?
One of the two primary and driving human emotions, fear and greed – this sits very firmly in the later.

The hook that will sucker people in is their greed for a £4,800 per annum return on a £15,000 investment. 32% return per year 160% over the 5-year term - How realistic is that?

What legitimate business would need to pay credit-card rates of interest to fund their sound and credible business model? It is off the scale nonsense that only those who let their greed emotions blind them to the sheer lunacy of this proposal.

My prediction

The monthly payments continue for several months to hook you in and convince you its genuine and the company will hope you rope others in to invest. Well before the end of the 3 or 5 year term, they liquidate the company (having first hollowed out the company bank accounts) and keep yours and everyone else's £13,000 seed capital - they win big, all who invested lose.

Protect your investments

Enthusiasm does not replace due diligence.  You need to know the details of who you’re dealing with and get evidence that they are legitimately contracted to provide social housing – and not a third party trying to spin a fast buck.

You will be making a loan to a Limited Company, with little if any trading history - check Companies House for their filed returns.

Are the target group asking for your money, whoever they might be, legitimate?  Care agencies/charities/housing associations can definitely claim money from the government for housing, but are you actually dealing with one of these agencies?  Typically, these agencies don’t run investment schemes.

If you own the property and deal with a legitimate agency that’s one thing, but the minute the chain between owner and tenant expands past one middle-man, it is likely to be dodgy,

Rent-to rent only works if you have no mortgage or a commercial mortgage that permits leases.  And that means you’ll pay a higher interest rate.

There is a legitimate way to sublet commercially, but, while it may sound attractive, investing in these schemes is appealing to people’s intention to do good, but giving a false impression and compounding it with impossible returns on their investment.

If you haven’t got enough for a deposit, it can be tempting to see it as a way to grow your nest egg.

It’s a legitimate proposition with an illegitimate underbelly.  Don’t fall into the trap.