Why I won't invest in Buy2LetCars

In these days of low interest rates many savers are infuriated by the difficulties in finding a place to put their cash where it will grow - or at least beat inflation.

It has been over five years now since the Bank of England slashed the base rate, dragging savings rates down with it. So, any investment offering big returns is going to turn heads.

One such investment is offered by Buy2LetCars. The company says investors can look forward to returns of 33% over three years. You hand over £13,500 and then receive a monthly income of £250 plus a lump sum of £8,955 after three years.

That adds up to a profit of £4,455. The same amount in a top-paying savings account would earn just 2.5% interest giving a profit of £337.50. Or, if you had invested that amount in a FTSE 100 tracker over the past three years you would have made around £2,673.

So, with Buy2LetCars offering such impressive returns why haven't we all piled in? According to the owners of the company they currently have just 300 investors. It is a surprisingly low number considering the money on offer. It appears many people think the same as me, it has to be too good to be true. Internet forums are full of people deriding the idea and saying it must be a scam.

I've spent a good deal of time interviewing the owner of the company and looking into its financials and it does not appear to be a scam, but I for one won't be investing. Here's why.

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1. You have to tie up a lot of money

The idea of Buy2LetCars is that you stump up the cash for a brand new car. The company then leases that car to someone through its sister company, Wheels4Sure. You technically own the car throughout its three-year lease and keep hold of the V5C form only transferring ownership at the end of the term when you have had your cash back.

But, you need to be able to invest £13,500. You will then receive £250 a month income, but you won't be able to access the money you invested. Instead you'll have to wait until the three years are up when you'll receive a final £8,955 lump sum. So, you can't invest your emergency fund. This needs to be money you can afford to say goodbye to for at least three years.

2. You could lose your money

Buy2LetCars is entirely unregulated and not part of the Financial Services Compensation scheme. So, if the company was to go bust or simply disappear you would receive little help recouping your money. Technically you would own a car somewhere but finding it could prove very tricky.

While you own the car the company are down as the registered keepers on the V5C form (so that you don't get sent speeding tickets, or have to worry about insurance). So, if things went wrong you would be reliant on the administrators finding your car and either arranging for you to have it or for the leaseholders to continue paying. If this did happen you would lose your profits and also at least part of your initial investment as you could be left with a car that is worth a lot less than you invested.

3. The investment process is untested

This is the main concern for me. There can be little doubt that there is demand for cars to lease, and the firm are making money by bulk buying cars so that your initial investment is more than the car costs. This means there is a fund for paying out if leaseholders default. Also the cars have GPS trackers and can be immobilised by the company if a leaseholder fails to pay or tries to disappear with the car.

All this means I'm not overly concerned about the monthly income while the car is leased. The part I struggle with is how you get your initial investment back, plus a profit at the end of the three years. At that point Buy2LetCars have a three-year-old car that is worth nowhere near what it was worth on the forecourt.

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After deducting the monthly payment of £250 you receive during the three years you are still due a further £8,955 at the end. The cars the company typically buy are worth around £5,000 after three years, according to a quick look on Autotrader.co.uk. So, how do you get £8,955?

The owners of Buy2LetCars say that they would make that final payout from income they receive from car dealer 'kickbacks', profits they made on the difference between your initial investment and the price of the car, and profits made on the cars that have a higher monthly lease than the £250 you receive.

However, as yet no investor has reached the end of their three year term – the first one will next year. That is the big problem for me. Until I've seen evidence that the company can afford all those final lump sum payouts I won't be investing. But, with returns like that I'm hoping it all works out and will definitely be taking another look in 2016 when the company has had chance to prove its business model works.

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