While property crowdfunding is growing in popularity, not every investor will appreciate that it is an effective way to invest in a range of property types.
Essentially, a crowdfunding opportunity will see a large number of people chipping in to buy a property, so they all own a small percentage of it.
But why has it become so popular? Why should an investor look at crowdfunding? The simple answer is that those organising the crowdfunding project will be offering better returns than the investor will otherwise enjoy if they left their money in the bank.
It’s also a way to enjoy better returns if, as a property investor you don’t invest in the right property, in the right area at the right time.
Crowdfunding usually entails having a minimum investment – some will have a minimum of £10, though £100 is more common – and in recent years, the number of crowdfunding platforms has grown which has led to a huge increase in the number of investment opportunities for small investors.
Why crowdfunding has taken off
Another important reason why crowdfunding has taken off is that it gives investors the opportunity to diversify their investment portfolio across a number of assets, particularly for investing in several investment properties.
You could invest in:
Also, the investor does not have to be actively involved when it comes to sourcing and then negotiating for a property and then managing the refurbishment or the tenants.
For those who are interested in crowdfunding, you may need to appreciate that it’s a flexible investment vehicle and you should only use those crowdfunding platforms that have been regulated by the Financial Conduct Authority (FCA) so the platform will abide by a strict code of conduct.
The bottom line also means that the crowdfunding platform will have carried out due diligence on each of the property investment opportunities that are listed.
Attractiveness of crowdfunding for investors
The attractiveness of crowdfunding for investors includes:
- Investors can start with a small amount, for example, £10
- They can build a diverse and flexible property portfolio delivering a range of yields and returns
- They can opt for those projects that suit their own investment criteria and circumstances.
For the money, crowdfunding offers a viable alternative to buying an investment property in the UK because the investor will not need a lot of cash for the deposit to get a mortgage or money to refurbish.
The benefits of crowdfunding include:
- Purchasing property with a small investment
- Ability to quickly build-up a diversified property portfolio
- No worries over tenants or repairs and rent collection since this is done for you
- You can invest even though you may not qualify for a mortgage.
The downsides for crowdfunding investment include:
- Profits will be lower since there are more fees involved
- Reduced yields as there are more shareholders
- You have no influence over the property management
- You will have little say over whether the property will be retained or sold
- You may be locked into an investment for a set period.
And, finally, you should also appreciate that crowdfunding is relatively new, so no platform has a long track record of success for you to appreciate what the long-term viability of these types of investments will be.
Can you crowdfund to buy a house?
One of the big attractions for someone who is struggling to save a deposit to buy a property is the opportunity of crowdfunding for the purchase of a home.
This is possible and there are dedicated websites for this purpose and, let’s face it, it’s possible to crowdfund just about every financial need.
At this point, you should really appreciate the difference between crowdfunding and peer-to-peer lending.
Investing in a crowdfunding platform will give you a share of a property’s equity while peer-to-peer lending gives you a share of the debt because you and your fellow investors are essentially offering someone access to a mortgage.
Also, some people have tried to use crowdfunding platforms to get onto the property ladder because they find saving for a deposit ‘a struggle’ – it’s a worth a shot if this applies to you but be prepared for some honest comments on the webpage.
In theory, you could use a crowdfunding platform to source money from investors without offering a plan to repay them and simply rely on their goodwill. Good luck with that.
Property crowdfunding platforms
Perhaps the most enthusiastic users of property crowdfunding platforms will be buy to let investors who don’t have the money for a deposit or do not like the prospect of managing tenants or having to deal with letting agents.
Instead, the cheaper way to access the letting sector is to team up with other investors and have a professional run the property on your behalf to deliver the expected profits.
Essentially, property crowdfunding offers the opportunity of building a buy to let property portfolio without the hassle, expense and time-consuming commitment of buying rental homes yourself.
To make things easier, the platform will take care of the entire investment process. However, since a limited company will be created for the investors – it’s known as a special purpose vehicle (SPV) – then it’s this company that will buy the property and not the crowdfunding platform.
This means that you will buy shares in a limited company to own the building.
Also, if you need to disinvest, then you’ll need to look at the small print for the platform’s agreement.
Some will give investors the option of leaving after five years and some will offer a facility to help find buyers to take up your shares. Otherwise, you’ll be locked into what could be a five-year term before your fellow investors decide what they want to do.
Should you be in dire need of cash, then you also need to appreciate that selling your shares will not be an instant process but can take weeks or even months to find a buyer or you may have to wait for the investment property to be sold off.
Property crowdfunding risks explained
While property crowdfunding sounds like an excellent way to create a property portfolio at a reasonable cost, there are downsides which will include:
- The investment property may have void periods, which means there is no rental income
- The property’s value may fall which will impact on the capital gains
- The property may require repairs which will increase expenses.
The other issue when it comes to crowdfunding problems is that you’ll need to rely on the platform. Essentially, it’s the platform that will manage the investment and if they fail to find tenants or are spending too much on maintenance, then there’s not a lot you can do about that because you are a small shareholder.
There’s also the risk that since crowdfunding has undergone something of a boom in recent years, you also need to consider the risk that the platform will go out of business.
Should this happen, then you’ll be protected because you’re essentially a shareholder in the SPV that owns the actual property and others could take over the property management. You won’t be a shareholder in the platform.
Best crowdfunding property platforms
If you are looking for the best crowdfunding property opportunities then, as with all investment opportunities, research will be key.
We have already mentioned that crowdfunding for property investments have boomed in popularity with lots of platforms offering a range of opportunities.
The most popular platforms are Property Partner, Property Moose, The House Crowd and Yielders. All have their pros and cons and we will be looking more closely at Property Partner to offer a review and also for Loan Pad. We have also looked at the crowdfunding offering from Brickowner.
It’s certainly worth shopping around since the platforms will offer different rates of interest, various ways to access their products and you need to be reassured that they will deliver on their promises. So check out independent reviews and client testimonies before signing up.
Commercial property crowdfunding
Along with crowdfunding for residential property, there are also great opportunities for commercial property crowdfunding too.
Indeed, there’s a lot to recommend crowdfunding for a commercial property opportunity with one big attraction being that tenants tend to stay in a property for much longer, pay more and some leases will have the tenant be responsible for maintenance issues.
Most platforms offer commercial property crowdfunding opportunities from warehouses, offices to supermarkets. There may also even be opportunities to invest in student accommodation, which tend to deliver higher yields returns than most property types.
What property crowdfunding is
Essentially, what property crowdfunding really boils down to is that it’s an ideal investment opportunity for those who appreciate the appeal of owning a property as an asset, but who may not have the time or the funds to invest in buy to let properties.
Crowdfunding also gives an investor access to professional property management without having to become embroiled in tenancy issues or maintenance problems – from a small investing base.
One thing is for sure: The world of property crowdfunding will be here to stay and will increasingly become an investment route of choice for growing numbers of investors keen to diversify and earn better rates of interest than they will get from a savings account, for example.