In the news was this article titled "Amateur investors lose £1bn in Powerhouse buy-to-let schemes". The Northern Powerhouse is the huge regeneration program of the North of England, where the government has poured billions and has just committed this week to pour further tens of billions with the HS2 fast train line connecting the South (London) to the North (Birmingham, Manchester, Leeds...) planned for 2035-2040 🤦. Anyway... the article explains that investors were duped out of their savings or retirement funds by glossy brochures offering huge returns on investments in luxury flats, hotels, care homes and student housing. Apparently, up to £1bn from 20,000 investors had been lost 😧
I have to remind myself that in my case, I did a super detailed due diligence and that all will be all right, because this is the type of things that scare the s... out of me!
I am subscribed to many investment platforms, that's part of my continuous education (seeing what's out there). Therefore it is very likely that I also received the same glossy emails promising the juicy returns on a safe property development sponsored by the government and a picture of the Chancellor shaking the hands of the developer alongside the Mayor... You get it, the kind of "it's all amazing they are giving money away".
We have to remind ourselves constantly that vultures are as much attracted by opportunities than good and honest people.
As a side note for those of you who are registered to this blog, I noticed that some of my posts are prone to be redirected to the spam box. I encourage you to verify your spam box and maybe check if you have not missed any post. So far, I always post an article over the week-end, so if you did not have one, it's in your spam... A good way to avoid future loss of email is to whitelist me as a sender.
For your own benefit, as well as my self healing, I will walk you through how I got into my investment. First, I receive an average of one solicitation per week. In general, they offer between 8-15% yearly interest. One would think that the higher percentage of interest is always the riskier scheme, but I do not think it is always the case. All investments have to be viewed on their own merits, and that clearly includes the risk.
The one I invested in recently, I received their first email mid last year. They were at the beginning of raising their fund. My risk approach means that I am not investing in a fund at its inception. Too risky. You do not know if they will even start building or what... So I gathered the documents, got a call from them and acted as interested in principle but critiqued their package so much that it ensured they would not call me back. The other reason why I accepted this call (why this one and not any other?) is because the property development happens to take place in my local area, and I see it twice a week at least, as part of my routine morning runs. If you remember my approach in Out of the Rat Race, as much as I can, I try to invest in places I understand well, and that means my local area is top of this list, as opposed to the Northern Powerhouse of England that will exist in 2040!
During one of these morning runs, I saw that they were starting putting their scaffolding up. This is getting serious, they are really going to build their project now. So I asked if they were still taking investment... Who would not take up a new investor? They said the fund is closed but...😇 there may be a way... Ah, I am the last one in. That's what I want 🤫
Look, they are likely to want to exit all investors at the same time, and not one by one (too much admin), so I may have a chance to exit in 8 months whereas others have been in there for 12. Another risk management principle. Last in, first out.
Now, for the numbers... £11.6m gross development value (GDV - resale value if you want) with 26 flats to sell. It's not tiny, but it's not huge. At the same time, the Brexit uncertainty having gone, it's quite likely that the GDV has improved by a percent or two (the development was evaluated in an uncertain time, but will be sold in a relatively more certain time). All cost included, I spare you the long list of costs that I went through, the development will cost around £10m. That also includes an extra 2.5% contingency buffer. So we have quite of a buffer, between cost and value. But in addition to this, the developer has put a lot of its own money into the scheme. I mean by this that they put in nearly as much as all the investors combined. So two things happen to counterbalance my risk:
- They are super motivated to make a big profit out of this (the profit is made on selling the development at a profit, and not by raising investor's money)
- If it really goes bad, there is an extra buffer for all investors, which is the unsecure capital that the developer has committed to the project
And what about the reward? They had a scheme in tranches (the more you invest, the more you earn) giving back 11%, 13%, and then 15% for the largest investors. I went through a lot of numbers to understand how they operate. I got told they had 36 investors. From this, I calculated the average investor value, and decided to invest twice this amount. I want to be the last investor coming-in, and I want to be one of their most expensive investors, so that they pay me back first.
That's it really. Then I can assure you that wiring the money takes a lot of courage and replaying of the same analysis over and over again. But as I indicated already, extraordinary times require extraordinary decisions. I made the plunge 🥳
I will make sure I keep you updated on this. First, their agreement is to pay back the interest within a few weeks of the investment. That should come in the next month. Then, we wait to get the return of the capital. Currently hoped for October...
To your journey!