It’s becoming one of the most popular ways to invest in property, but what are the pros and cons of property crowdfunding?
Sure, there are risks. I mean, you’re investing in property with people you’ll never even meet.
However, there are also upsides as it allows you to spread even a modest investment over several properties.
So, let’s take a look at what the main pros and cons of property crowdfunding are so you can decide if it’s right for you.
What Is Property Crowdfunding?
Before we get too far in, it’s worth us defining exactly what we mean by ‘Property Crowdfunding’.
If we start by taking the dictionary definition, we find that ‘Crowdfunding’ is:
the activity or process of raising money from a large number of people, typically through a website, as for a project or small business.
So, in short, crowdfunding is when many people pool their money together, usually via a website, to enable them to create a much larger amount.
Property crowdfunding is, therefore, when many people pool their money together to buy a property, either to rent out or sell on. The money could also be used to fund a development opportunity.
Each individual then benefits from the income and profit the property generates based on their share of the original investment.
How Property Crowdfunding Works:
Property crowdfunding usually starts with a website that acts as the middleman. The company behind the website will usually be the ones sourcing the investment opportunities.
This could mean they are directly buying up properties and managing them on behalf of investors.
Or, it could mean they are introducing the investors to the developers or other property managers and purely acting as the link between the two.
So, a good property crowdfunding website will need to be sourcing opportunities (directly or otherwise) and attracting enough investors to successfully fund the available opportunities.
It’s a bit of a catch 22 situation since investors won’t join a property crowdfunding site until there are good opportunities available, yet good opportunities are hard to find without a queue of investors lining up to take them!
However, once a site has cracked it, they can advertise an opportunity and have hundreds, sometimes thousands, of people invest money in exchange for a share of any profits it generates.
Once the profit is available for payment to the investors, or the investment has reached the end of its term (in the case of fixed-term investments), the crowdfunding website will organise payment to the investors.
They’ll also deduct their own fees at some point during the process as payment for finding and managing the opportunity and crowdfunding.
There is of course much more to it than that but that describes the general process in a nutshell.
Advantages Of Property Crowdfunding
There are a number of advantages of property crowdfunding that include (but are not limited to):
- Open To Anyone – Some sites allow you to invest with as little as £100, making property investment more accessible for a broad number of people.
- No Experience Required – You don’t need to know everything about property investment to get started.
- Risk Spreading – Because you can invest with less, it’s easier to spread your investments over multiple opportunities.
- Good Returns – Typically the returns you can make are higher than if you just leave the money in a bank account.
- Have A Say – Many crowdfunding sites allow you to have a say in which tenants you accept, and when to raise rents, etc.
Of course, which of these really matter to you will depend on your own situation.
Disadvantages Of Property Crowdfunding
As with anything, there are also a number of disadvantages to be aware of if you are considering investing in property crowdfunding, such as:
- Capital At Risk – Investments can go down as well as up, you could lose your entire investment
- Tie-Ins – Although some sites allow you to exit investments early, in many cases there’ll be a penalty for doing so.
- Lack of Control – Although you’ll usually get to have your say, decisions are made based on the majority vote.
- No Access – You can’t just turn up at the property and check its condition or make improvements.
- Liquidity – Poor performing properties may be difficult to exit from early.
Some of these may, or may not, be a concern to you. It’ll depend on how much you have to invest and your own attitude to risk.
The best advice we can give you, though, is to never invest more than you can afford to lose.
So, Is Property Crowdfunding A Good Investment?
Now that we’ve considered the pros and cons of property crowdfunding, can we confidently say it’s a good investment?
Well, there are definite advantages to this method of property investment, but it’s also very different to traditional property investment.
If you’ve got the funds to invest in properties by yourself, and have the time and willingness to manage everything, crowdfunding may not be for you.
You’ll probably make better returns and enjoy being able to make all the decisions if you’re on your own.
However, if you have limited funds or lack the time or inclination to manage the investment properly, property crowdfunding opens the doors to property investment like never before.
It can also be a great way to dip your toe in the water if you are new to property investment.
Take part in a few property crowdfunding opportunities and start familiarising yourself with the terms used and the common problems experienced by individual investors.
How To Start Property Crowdfunding
If, after assessing the pros and cons of property crowdfunding, you’ve decided to give it a try, you’ll first need to choose a platform to invest in opportunities with.
There are multiple sites to choose from, each of which have their own pros and cons. Some will focus on buy to let opportunities, some focus more on development opportunities. Some even specialise in providing loans to property investors.