Property investment schemes to avoid
If a property investment is described primarily by its return rather than by the asset, the return is the product and the asset is the excuse.
Property attracts investment schemes because it is tangible, familiar and financed with debt, which makes large numbers look plausible. The schemes vary in structure and share a common feature: they present a return without presenting the asset.
The pattern is worth learning, because each individual scheme is different and the underlying proposition is not.
The warning signs
These are the features that should stop you and make you ask for the underlying numbers.
- A guaranteed return, particularly a guaranteed rental income for a fixed period
- A rental guarantee paid by the developer rather than by a tenant, which is a price discount in disguise
- Off-plan purchases in a market with no comparable completed stock, so the value is unproven
- A yield calculated on a rent that no independent letting agent has confirmed
- Pressure to exchange quickly, or to pay a reservation fee before due diligence
- A structure where you do not own the property outright but hold a lease, a share or a contract
- Returns described as a percentage with no reference to the costs
The rental guarantee, specifically
A guaranteed rent sounds like a reduction in risk and is usually an increase in price. The developer builds the cost of the guarantee into the purchase price, so you pay more for the property and receive your own money back as rent for a period. When the guarantee ends, the rent reverts to whatever the market actually pays.
The question to ask is what the property would let for without the guarantee, evidenced by an independent letting agent, and what the price would be without it. That comparison usually reveals that the guarantee was paid for up front.
The structures that remove your control
The most dangerous schemes are those where you do not own the property. A lease of a room in a hotel, a fractional share, an unregulated collective investment scheme, or a contract for a property that has not been built all leave you with a claim rather than an asset.
Where the investment is a financial product rather than a direct property purchase, it may be regulated, and the firm must be authorised. Check the Financial Conduct Authority register, and be extremely cautious about any scheme that describes itself as a property investment while being structured as something else.
Common questions
- Are guaranteed rental income schemes worth it?
- Usually not. The cost of the guarantee is normally built into the purchase price, so you pay more for the property and receive your own money back as rent. When the guarantee ends the rent reverts to the market rate, which is often lower. Ask an independent letting agent what the property would let for without the guarantee.
- How do I check whether a property investment is regulated?
- If the investment is structured as a financial product — a fund, a collective scheme, a leaseback arrangement — it may be regulated, and the firm should be authorised by the Financial Conduct Authority. Check the FCA register. A direct purchase of a property you own outright is not a regulated investment, which is why the structure matters.