The shocking truth about buy-to-let investment clubs

published 1 April 2008

Over the past few years, as UK property prices have soared, buy-to-let investment groups have proliferated. But are they helping investors as much as they say they are?

Investing in property for the first time is a daunting task. There are all the details about legal, maintenance and professional fees to consider, as well as rental voids, tenant rights and other hidden cost considerations.

So investors are often pleased to find that there are companies willing and able to introduce first-timers to buy-to-let, educate them about the market, inspire them with confidence and steer them through the minefield of risks and potential pitfalls. Should they be? We've had a good look at the numbers given to us by one firm to see.

Inside Track sits between ingnue investors and the property developers willing to defray their risks and subsidise their construction costs by selling units "off-plan" before they're built. The advantage for the investor here is that they supposedly only ever need to put a deposit down, so if they're buying to flip' rather than buying-to-let, the gains can be a big percentage of the money invested.

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Better still, according to its literature, Inside Track really comes up trumps by getting paid-up members "genuine" discounts of "up to 15%". Presumably this means that some less-scrupulous companies offer discounts that aren't genuine, illustrating why a trusted adviser is so important.

And the folk at Inside Track aren't just trustworthy; apparently their advice is among the best in the business. In 2006/ 2007 Fuel Investments, Inside Track's buy-to-let financing and risk management arm, was voted UK Buy to Let Broker of the Year at Pink Home Loan Awards and Buy to Let Broker of the Year by Mortgage Strategy Magazine. There is undeniably sound advice, such as "acquiring property is the single largest purchase most people will make during their lives" and "mistakes can be hugely expensive".

Inside Track also tells us it refuses to source from "high-risk markets like Dubai, Bulgaria, Romania and Northern Cyprus" and instead sticks to the (presumably low-risk) areas such as Florida (where prices have fallen dramatically in the past year), Spain, the UK, and elsewhere.

It's surely a bit disappointing, mystifying even, that once amateur property investors have found such a trustworthy and talented guide to educate them about the opportunities and risks, that the rewards from property investment, Inside Track-style, have proved so elusive. Allsops, the independent surveyors, identified £179m worth of equity that Inside Track clients had made from "almost 17,000 units" costing a total of £2,400m by the end of 2006. That's a five-year gain of 7.45%, or nearly 1.5% a year, before costs.

Now, this bit we don't understand. Inside Track and its clients must have been very unlucky because, as we know, the genuine' discounts that Inside Track can get members are "up to 15%". If we assume that means on average they're half that or 7.5%, we can see that the £179m of equity, or profit, that Inside Track clients have made over the past five years is entirely explained by these discounts. What rotten luck, therefore, not to have made any money at all from a booming global property market. In this country alone prices have, according to Nationwide, grown in value by almost 60% in the five years. £2,400m invested in UK property five years ago could have been expected to have generated more than £1,400m in equity not far off seven times more profit than Inside Track members generated.

There's always the chance, of course, that the properties in question were bought in 2006, so the full 7.5% return was made in just one year. But even then it doesn't seem that tip-top: UK house prices rose 10.5% in 2006. It does make you wonder whether those developers were always giving Inside track the discounts they said they were. If we were Inside Track and its clients, we'd be jolly cheesed-off.

For some people the knowledge that they're in safe hands will be worth more than just a little bit of profit here or there. Even though amateur investors might be worried that if an Inside Track portfolio had made no money at all, beyond the developer "discounts" they'd won for their members during the property bull market, it might be vulnerable to a drop in a bear market.

But Inside Track's website carries a reassuring message: although under the heading "Price Risk", it points out that "investing in property can be profitable in good times" (though this is not in any way certain), the really good news is that investing in property is "even better in bad times". I've no idea what it means by this but it certainly is comforting to hear, especially in light of the disappointments of the good times.

And this is the sort of comfort that many people are willing to pay for. More than 100,000 people have attended the introductory workshop, says Inside Track, three-quarters of whom then think they have seen enough. Only a quarter have gone on to take the two-day seminar. This makes them "aware of the core principles" of property investing and costs £4,000. Inside Track appreciates this is a lot of money and often discounts the price to just £2,495. Still, since the average wage in the UK is about £80 a day after tax, this just shows how valuable these core principles must be.

Understandably, if investors want to gain access to investing off-plan in the UK and overseas developments, they have to pay more. As we've already established, the only clear advantage that Inside Track investors get is via introductions to these genuine' discounts. Without these, Inside Track members have on average made no money at all from the bull market. So what does it cost to get on the inside track? To join membership in Instant Access Properties (IAP), which more than 10,000 lucky amateur investors have already done, costs "approximately" £6,495 and then a further £119 per month.

So if a client paid the full whack for the seminar and then joined IAP they could end up after three years having paid out up to £14,779 even if they never bought a property. Make that five years and it comes to £17,635. But I expect they know what they're doing, at least once they've completed the courses. But it seems a shame to have gone to all that trouble, attended all those courses and paid all those fees not to have taken advantage of the off-plan discounts that Inside Track makes available. If members do buy, Inside Track charges them a 3% introduction fee'.

All told, based on the figures give to us by the firm, it seems that the average Inside Track client over the five years in question has bought 1.7 units at an average unit cost of £141,176.47. Although Inside Track notes that a member getting a 15% discount on a £200,000 property would recoup "the cost of membership many times over on the very first property", on average it doesn't work out quite as good as that. Let's say you bought five years ago, stayed a member of IAP for three years and have made a profit of 7.46% profit. According to the company's figures that would be a profit of £10,529.41. But at the same time they will have paid out £14,000-plus in fees to Inside Track. Not long now and they'll be evens!

Assuming property prices in the US, UK and Spain stop falling, that is. Note that by December last year prices had fallen by 17.5% in Miami in a mere 12 months.