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  • Peer to Peer Lending

    Legal process to accepting investment

    Hi,

    I have recently had enquiries from friends and previous colleagues about investing into developments that I will be undertaking.

    Having not previously used private investment for such cases, I am unsure of the legal and contractual requirements to have put in place to give the investors peace of mind as opposed to just a handshake.

    Would I have to give them a disclaimer making them aware that all investments are at their own risk etc?

     Any advice would be kindly appreciated.

     Thanks 

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    You need to be very careful here.

    If your friends are investing with you and expecting a profit share, then that is known as a "collective investment scheme" and you would have to be FCA regulated.

    If they are just lending you money with a percentage return, their solicitor should be working up the documents, not yours!  They should also be able to have a charge on a property owned by you, or on the property they have lent money on.  If there are multiple investors, then the "security" issue becomes more of a challenge.

    Disclaimers are meaningless in this context, as it is all unregulated and they enter into it at their own risk. 

    It's high risk to your investors and low risk to you, and I am not a fan of these structures, so please forgive my stance on this, but I've spoken to too many people over the years who lent money to family / friends and never saw a penny of it back.  I am not saying this will be the case with you, but going down this road could lead to the destruction of relationships if things do not work out as you hoped. 

    With the extremely challenging market conditions and margins being squeezed, you need to be very careful about what returns you offer as well.

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    Thank you for your advice and feedback Vanessa.

    The investment would be hands off for the investors so it would be a straight forward percentage ROI.

    I understand your point about investing with friends/family. I would categorise the potential investors as aquintences so their really is no emotional or social attachment there. All the same I would not like to lose anyone’s money.

    They have approached me so I am sure they will understand the full risk of investment but all the same I would like them to have the opportunity to have peace of mind. It sounds like it is down to themselves and their solicitor.

    You mention investors having charges placed when investing. I would be unable to offer that as I have other finance that is borrowed against properties at the moment. Do you see that as a stumbling block for the investment?

    Any additional investment is always welcome to increase development output but I can still grow quite organically without it at this stage so it will be something I will have to weigh up from here. Always great to hear other opinions on the matter though.

    Thanks

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    Vanessa, you caught me off guard regarding the Pooled investment, however I think if it’s a single asset investment and so not spreading risk it is except (PERG 9.5.1).

    EzraC, this is one of these situations where it does not matter about the law or the situation. How would and your (former) friends and colleagues feel if the investment went sour. If they are helping you on the project then it’s probably an easier pill to swallow than if they are taking a back seat and you are doing all the work. Using FFF money does allow you to scale first but I always ask my clients why have they invested - to help family is soft money but to get a financial return only means it is one you need to be careful of the downsides with. Investment red tape is all about protecting the downside for investors not managing family decisions. Be careful.

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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    Thank you for your advice Stuart.

    I understand your point with mixing investment with family/friends. Putting those relationships at risk doesn’t appeal to me, in this instance it the people offering investment are more aquintences/old work colleagues who have heard or seen what I do presumably through social media or word of mouth. As much as it wouldn’t please me to lose or put at risk anyone’s money, these relationships are not socially or emotionally driven.

    I am sure they understand the risk involved and with them approaching myself as opposed to me squeezing it out of them, it gives me a little more peace of mind that they are taking responsibility for their own actions.

    So in this case would it be left to them to have something drafted up by their own Solicitor?

    I have read that charges are sometimes requested on my properties as part of this agreement. As much as I would be happy to take investment this is not something I would/could do at the moment due to other financial lending against them. Would this usually be a problem? It does leave them slightly open but is that not the risk you take when investing in anything?

    Thanks

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    OK, a charge reduces the risk. What investment you get is very much risk v reward.

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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022