Kuta Beach

Kuta Beach

Sunday, 8 February 2009

Kiva for Residential Property Investors

The website Kiva allows individuals to loan money to entrepreneurs in poor countries. This popular website has grown a lot lately. A similar website is Microplace, which is owned by Ebay. Microplace also allows investors to loan money to entrepreneurs in poor countries but the primary difference is that Kiva does not pay back interest while Microplace does pay back interest. Both Kiva and Microplace are US websites. Kiva allows non-US citizens to loan but Microplace does not.

Loaning through Kiva is very simple because you only need US$25. Your loan is pooled with the loans of many other investors.

Buying residential property as an investment is often very difficult because house prices are typically very high. The average house in Australia costs about A$400,000 (approx US$300,000). Because of this, the typical person has to either save up for a very long time in order to afford to buy a house or borrow a lot of money from the bank.

I believe it would be a great idea if a website exists that takes the Kiva idea of collective investing and applies it to the residential property market. I believe there is strong demand for residential property investing in Australia, but because taking out a massive loan or saving up to buy a house is such a major task, most people never take the leap. A Kiva-style website for residential property investors will give these people an opportunity to dip their toes in the residential property market with little money and therefore little risk.

Here is how the website will work. You look at houses that are for sale. You get an expert property valuer and value a particular house. You borrow how much you think the house is worth from a bank and you go to that house's auction and try to buy that house for what you believe the house is worth. If you are successful, you put the house on the website and ask investors to invest in it. If not enough investors put money in, you have overestimated demand. Once enough investors put enough money in, you pay off the bank's loan immediately. You get lawyers to draft a contract in such a way that title of the property is split among the many investors who have invested. Every house will have a specific loan term. This house you have purchased will have a loan term of e.g. three years. During these three years, the property is rented out. The rent will be collected monthly and then distributed to all the investors. Once three years has gone by, the house will be sold and all the money you receive will be distributed back to the investors.

Under this system, if an investor invests in a particular house then he or she will not be able to get his original capital back until the house is sold (which is three years in the example given above). The investor will receive income for the first three years and then when the house is sold the investor will be able to collect any capital gain or capital loss.

What if an investor needs money straight away? We can modify the system to make it more like investing in the stock market. We simply treat each house as if it were a business that produces revenue in the form of rent and we allow investors to buy shares to guarantee ownership of a portion of that stream of rental revenue. For example, suppose 100 people invest in one house. If the house collects, say, $1000 per month in rent then each investor will get $10 per month. If after one year a particular investor wants to cash out completely, he can sell his right to receive $10 monthly to someone else. Clearly this system would be a lot more complicated.

One reason why I believe Kiva is good is because it does not charge interest. This can be good because if investors get not interest then they do not have to declare anything during tax time. Obviously with this collective residential property investment scheme, investors need to collect rent or capital gains. Kiva investors are willing to forego interest because they want to do good for the world. Real estate investors, on the other hand, tend to want to invest only for the sake of making money. Because of this, the real estate website, to be successful, will have to provide investors will a lot of support with their taxes, which will mean providing investors with tax statement before tax time every year as well as providing free accountants who will do their tax forms for them if they are having trouble.

This website will make money by charging a fee. For example, three per cent of the rent and three per cent of the total value of the house will go the business.

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