Episode Details

Joseph Kennedy, the father of John F Kennedy, once said that when shoeshine boys were telling him to get into the stock market, he knew it was time to get out. That’s exactly what he did just before the 1929 stock market crash, which was followed by a bear market which lasted for decades.

Sometimes I feel the same about property when everyone seems to be jumping on the bandwagon. Now, there is even a company offering investors a way to buy a buy-to-let property with the click of a mouse.

Can you really buy a property online just like ordering something on Amazon? Well, not quite.

Dot, a Californian company with offices in Manchester, effectively gives you the facility to reserve a property online, leaving completion and the legal work to be done later on.

Investors are told that they can buy one and two bedroomed properties costing up to £200,000 in a “few pain-free minutes”, with just a few clicks, and enjoy a yield of up to 6% pa. Once you have selected a property, the company sends out a computer generated image of what the property would look like when refurbished, without investors needing to visit the site themselves. I guess this would be of more benefit in America where a site visit could involve thousands of miles of travel and even a flight.

The company is currently packaging up to 40 flats in Manchester, Birmingham and Leeds, Cities which it has identified as rental growth areas.

They told the Sunday Times that they expect it “will be completely normal for an investor to acquire, renovate and hold properties without ever visiting them in person”.

After the property has been reserved and Dot has carried out a credit check and verified that the investor is earning at least £30,000 per annum, the company lends investor the money to purchase the property and pay all of the stamp duty and legal costs, plus Dot’s 3% fee – which is £6000 based on a typical £200,000.

The loan, effectively a bridging loan, is offered at 0.6% per month or 7% per annum for 12 months. Investors are required to contribute a minimum 25% deposit.

Dot also sets up a limited company in the investors name, so that tax on the profits will be paid at the corporate rate of 19% rather than personal rates of 20%, 40% or 45%.

After the sale has been legally completed, Dot will offer to refurbish the property for an agreed fee, which can take up to three months.

Before refurbishment starts, the investor takes out a second mortgage with Dot, on the same terms as the first bridge, to cover the interest accrued on the first loan plus the cost of the works.

Note that at this point, the investor has still not paid anything more than their initial 25% deposit.

When the works on the property have been completed, the investor takes out a new long-term mortgage to refinance the first two bridging loans, based on the new higher value of the property. Dot then arranges a mortgage at an annual interest rate of between 2.89% to 3.99% for up to 30 years.

This reflects the higher mortgage rates paid by limited companies. It is still a mystery to me why the mainstream lenders have not got in on the market for lending to limited companies at more competitive rates than those offered by some of the more expensive challenger banks.

Investors are free to arrange their own mortgage and find their own letting agency to manage the property.

Bear in mind that unless the property has dramatically increased in value, you will need a bigger deposit than 25% (you are unlikely to be able to raise much more that 75% and may be lucky to get 70%) to take out the previous Dot loan, fees and refurbishment costs.

Based on their current projections, investors who stay with the company would make £3358 per year from a two-b