Property investment often yields higher returns than sticking your money in a savings account or ISA. Unlike futures trading or similar risky investments, property is widely considered a relatively safe long-term investment, as capital growth typically follows an upward trajectory and rents rise in a corresponding fashion.
However, not everyone has the time and/or experience to successfully manage a buy to let property. There is a lot of red tape associated with being a landlord and managing tenants can be time-consuming. Property is an illiquid investment. It can take months and a significant amount of stress to sell a property.
The beauty of property crowdfunding is that it’s largely a hassle-free process. All you have to do is decide how much you want to invest and choose a site to invest with. A few clicks of your mouse and it is job done… or is it?
The truth is that property crowdfunding can be a great investment but as with all things there are pros and cons. Join us as we delve into the intricacy of property crowdfunding.
What is Property Crowdfunding?
Sometimes crowdfunding and peer to peer lending are thought to be the same thing, but they are both different. In this article we’re looking exclusively at property crowdfunding. This Property Road article on The Differences Between Peer-to-Peer Lending and Crowdfunding is a great resource for those looking to understand the differences.
Property crowdfunding is where property companies use a platform to raise money. It is a type of equity investment, as you own a share of the equity.
People who sign up with a property crowdfunding platform can invest their money directly into one or more properties, which are managed by the platform or a third-party management company.
Whereas a landlord must buy their own property and manage it themselves or pay someone else to manage it, property crowdfunding is done at arm’s length. Instead of owning 100% of an investment property, you and a number of other investors all own a share in one or more investment properties.
There are different types of property crowdfunding.
Type one is where you buy a share in a buy to let property. The property is let and the rental income minus fees is split between each of the investors. This is classed as a long-term investment. If all goes well, it should provide a steady income stream along with some capital growth.
Type two is where you buy a share in a property development project, such as the construction of student flats or a housing development. Once the project has reached completion, you and the other investors each take a share of the profits. This is a short-term, much riskier, investment.
Make sure you know which type of property crowdfunding you are investing in from the outset. Some property crowdfunding websites offer a mix of different investment models, which can be confusing to the inexperienced investor.
A Quick User Guide to Property Crowdfunding
Before we discuss the pros and cons of property crowdfunding, let’s look at how it works in more detail.
The property crowdfunding platform finds suitable properties for investors. These can be anything from a single buy to let property to a block of rental flats. Investors are given the option to invest as much as they want in the property.
Once the investment fund reaches the required target, a company is set up to buy the property. This is referred to as a Special Purpose Vehicle (SPV). Each investor receives shares in the company in direct proportion to their investment. So, if investor A contributes 10% of the property’s purchase price, s/he will receive 10% of the share capital.
The platform or a third-party management company finds a tenant and takes over the day-to-day property management. Costs associated with property management are deducted from rental income, as they would be in any buy to let business. The platform/management company is responsible for everything, including property maintenance. If the property is not well managed, costs will be higher and rental yields lower.
Investors receive their money in the form of a proportional dividend. Using the example above, investor A would receive a 10% dividend from the rental income minus expenses.
Different property crowdfunding platforms do things differently, but they all follow a similar model, as outlined above.
You can opt to invest in a single property/development or split your investment between multiple properties.
There are fees, of course, which reflect the amount of work the platform and the managing agent does. Factor in the fees when calculating your potential investment returns.
The Advantages of Property Crowdfunding
There are many advantages to property crowdfunding compared to traditional buy to let investment.
1. An inexpensive investment
The average house price in the UK was £234,742 in December 2019. Buy to let mortgage lenders typically require a 25% deposit. To own a buy to let property outright you’d need £58,685 in your pocket before any out of pocket expenses, such as legal fees and survey costs.
Investment property crowdfunding is much less expensive. You can invest with as little as £100.
2. Anyone can invest
There are plenty of people who can’t invest in property the traditional way, often because they don’t have the means to secure mortgage funding. Property crowdfunding is open to most investors, as long as they have a small amount of money.
3. It doesn’t take long to invest in property
Investors decide how much they want to invest in a property or development and once the target amount is reached, the SPV buys the property. The platform then finds a tenant, does the admin, and collects the rent. Timescales will vary, but it should be faster than you searching for a suitable property, going through the conveyancing process, and installing a tenant.
4. You don’t need any experience
You don’t need experience to invest via a property crowdfunding site. The site takes care of the property management on your behalf, either directly or via a third-party management service. All you have to do is invest your money and wait for the profits to come in. For obvious reasons, it’s wise to keep a close eye on how well your investment is performing, but if you want, you can literally hand over the cash and forget about it.
5. You can make good returns
Interest rates are so low right now that pretty much any kind of investment beats leaving your cash in a standard savings account. Returns will vary, but you can expect something in the region of 7% if you split your investment over several properties and around 4% for one property.
Investment returns are a combination of monthly dividend payments and a capital gain when the property is eventually sold (if you still own a share in it).
6. It’s a hassle-free process
As investments go, property crowdfunding is fairly hands-free. Once you have invested your money, you don’t have to do anything. Whereas a landlord needs to find tenants, organise repairs, and many other everyday management tasks, in property crowdfunding, someone else does all the hard work. The platform does charge a fee for this, of course, but if you want an armchair investment, it’s worth considering.
7. You can spread the risk over several investments/platforms
You can spread your money over several different properties on the same platform. In addition, you are not restricted to just one platform either. Investors can spread their risk across as many platforms as they like.
8. You may be able to sell your investment relatively easily
Selling an investment property can be a time-consuming process. Even if you find a buyer straight away, it can take a minimum of 5/6 weeks to go through the conveyancing process. However, in most cases, it will be 3-4 months or more. And if you’re trying to sell an HMO, your target buyer market is far smaller, so it might be quite a while before you source a suitable buyer.
Property crowdfunding is different. You can’t offload your investment instantly, as it may take time to find someone to find another investor willing to buy your share. But it’s a lot less hassle, with no estate agents to deal with. Bear in mind, however, that some platforms lock you in for a minimum term.
The Disadvantages of Property Crowdfunding
It’s not all sunshine and flowers – if it was that easy, everyone would be signing up to invest! Here are some of the disadvantages.
1. Investments can go down as well as up
Whichever way you invest in a property, the risks are broadly similar. Tenants might not pay the rent. The property could require extensive work. Or it might end up empty for an extended period. All of this means your investment might sink like a stone. There is also the possibility of mismanagement should the SPV be run by inexperienced people.
2. It’s new territory
Property crowdfunding websites are fairly new, so it’s difficult to say how safe or profitable they are in the long-term.
3. You are still reliant on a third party company
There is no guarantee that the site you use won’t go bust. If that happens, you will still be a shareholder in the SPV, but someone else will have to be appointed to take over the management of the company, which could take time. In the event this does happen, it’s not an ideal situation and you will probably lose money in the process.
4. The associated fees can reduce returns
Compared to traditional buy to let investment, returns are usually lower with property crowdfunding because of the fees.
Fees do vary across the different platforms, but you can expect to pay:
Asset management fees
Stamp Duty Land Tax
Always check what the fees are before you invest. Ideally, look for a platform that offers a comprehensive breakdown of its fees, so you know exactly what you are paying and how this impacts your overall investment returns. That way you can make an informed decision.
5. No hands-on control
You don’t have control of the property. This is an arms’ length investment whereby the platform or its management company runs the property. If you’re not happy with the way your investment is panning out, there isn’t much you can do other than sell your share. If the platform spends too much on maintenance or makes other decisions you don’t like you don’t have any say in the matter.
6. You can’t see your investment in the flesh
Whereas a landlord can view their asset, as a shareholder on a crowdfunding platform, you are relying on the information given to you. You can’t go and check out the property or screen tenants. All you can do is hope the property you have invested in doesn’t have any major problems.
7. Can be difficult to liquidate an investment quickly
As we’ve already mentioned, it can take time to sell an investment share in a property crowdfunding scheme. If you are still within the minimum investment term, you may have to wait for another shareholder to buy you out, which might not happen quickly.
8. There may be penalties for an early exit
Some property crowdfunding sites set a minimum term before you can exit your investment. If you wish to exit during this phase, you have to wait for someone else to buy your share. There may be penalties for an early exit, so check this before you invest.
Property Crowdfunding Websites
There are a few property crowdfunding sites that are popular among investors. Here we’ll take a look at the different platforms you can use if you want to join the crowdfunding party.
Invest in rental properties or development opportunities. Users buy shares and then receive a percentage of the rental income minus fees monthly. Investors receive a return on their investment from month one, even before the property is fully funded.
This site offers direct investment opportunities via SPVs and loan notes. It is free to join. The site is currently undergoing a re-design, but you can sign up to get notified when the new site is live.
Invest directly in properties or development loan bonds. You can choose what to invest in or select one of the three investment plans. The plans are ideal for people who want to invest smaller amounts of cash.
As the largest property investment platform, this site is good for new investors. Rather than invest in a property directly, you invest in a loan given to the developer of a property.
House Crowd also gives you the opportunity to invest in loans to property owners or developers. Auto invest based on your risk profile, from cautious to bold. The minimum term is 12 months and interest is paid twice yearly.
Proplend deals with commercial properties. Investors can choose which properties to invest in or use the auto invest system. The average return on investments in 2019 was 7.95%.
The golden rule with property crowdfunding is to makes sure you understand the process before you invest. It’s undoubtedly a popular way to dip a toe in the property investment market, especially for those who don’t have the capital to purchase a property, but there are risks involved (as with any type of investment). Equity and P2P lending are both regulated by the Financial Conduct Authority, but practice due diligence before investing and stick to the most established sites, as these are less likely to go bust overnight.
If in doubt, it is prudent to only invest a small amount of spare cash rather than your life savings. Try investing the minimum amount and see how easy the process is. If you make decent returns, increase your investment, but keep a close eye on things and pull your cash if things don’t work out as expected.
We hope this has given you a useful overview of property crowdfunding. For more guides like this follow us on Facebook or Twitter, or sign up to our newsletter.
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