Crowdfunding is the practice of funding a project, business, investment or product through the contributions of a large number of people. It usually takes place online, with each contributor paying a different amount towards the total investment goal.
Property crowdfunding is simply the original crowdfunding process, applied to property investment.
Why property crowdfunding?
Property crowdfunding platforms allow people to advertise both commercial and residential properties, with investors putting in anything from £10 up to hundreds of thousands in funding in order to be part of the group that makes the purchase.
Properties are then rented out, with each investor earning a rental income over a pre-set investment period. An investor might also receive a final pay-out, as and when the property is sold, or their investment period comes to an end.
Property crowdfunding has been around since 2012 and is rapidly becoming a popular way to enter the buy-to-let market, without the hassle of becoming a physical landlord. Investors are also particularly attracted to the potential to diversify an investment across a large portfolio of different properties, in order to spread the financial risk.
Property crowdfunding is an easy way to invest cash, without the need for a solicitor or financial advisor. Students, retired people and groups of friends are all getting involved, as the practice often doesn’t require large sums of cash changing hands.
How does property crowdfunding work?
There are a large number of property crowdfunding sites out there, with hundreds of thousands of investment opportunities to choose from.
The process is usually quick and simple.
- Select the property or development that you’d like to invest in.
- Select your level of capital and the length of your investment term, and then make a pledge.
- Once you and other investors have promised enough money to fund the property in question, the process will be completed, and your payment will be taken.
- As an investor, you have now become a shareholder for this property, and will receive your share of rental return and capital growth, depending on how the investment is structured.
- You’ll receive a monthly, quarterly or annual rental pay-out, along with a final settlement payment as your term comes to an end.
What are the benefits of property crowdfunding?
Property crowdfunding is an easy, indirect way to invest in the property market without having a high level of knowledge or a large initial investment.
Buy-to-let investing is typically risky and often requires a large deposit to secure a mortgage. Add to this demanding tenants and broken boilers, plus costs incurred if you can’t fill the property 52 weeks a year, and you could be looking at a heavy amount of administration.
Investing in a crowdfunded property means that you can enjoy a regular income from rental property, without having to find or manage tenants, or taking responsibility for any maintenance of the property. It’s a hassle-free way to get involved in property investment and can help you avoid pooling all of your financial resources into one property. Instead, you can diversify across many different ones, including commercial property types, without a large cash outlay.
Investors can choose the level of investment their comfortable with along with the investment term that best suits them, with average deals ranging from between 6 months and five years.
Investing as a property crowd funder may also have a range of social benefits, as some platforms claim that they help to bring empty and run-down properties back to the over-stretched property market, while offering a transparent and professional property management service that’s a welcome alternative to the practices of some private landlords. Property crowdfunding can be seen, therefore, to help everyday investors, tenants and communities alike.
What are the disadvantages of property crowdfunding?
All crowdfunding platforms charge a flat fee on each investment, but some also apply a fee to rental payments, or when you finally cash in your investment. These are likely to make a significant impact, so be sure to factor these in to your financial calculations and find out when they’re due.
The crucial downside to property crowdfunding, as with any investment, is that your initial capital is not 100 per cent safe, nor are any returns guaranteed. Property and rental prices can go up or down, and there is a chance you may lose what you put in.
This type of investment is also not protected by the Financial Services Compensation Scheme, so be sure to research your investments as thoroughly as possible, read all terms and conditions carefully and only pay in what you can comfortably afford.
Finally, as a silent investor, you do not have any control over what happens to your property – whether this is how it’s renovated, the level the rent is set at or the type of tenants that occupy it. For some, this can be a frustration, rather than a benefit.
Is property crowdfunding safe?
Despite being a fairly young industry, property crowdfunding is quite tightly controlled by a strict code of conduct, set out by the FCA. Each property owner who lists their investment opportunity on a crowdfunding site is required to complete due diligence on that listing, providing all necessary facts and figures for potential investors to base their decisions on.
Those who invest, however, are heavily reliant on the quality of the property crowdfunding site they choose. Investors should also make themselves familiar with the terms and conditions of any investment they make – each site will have different rules, so never make assumptions.
As investors may also fund properties outside their local areas, there is a chance that mistakes will be made based on lack of knowledge about an unfamiliar area. Investors should always carry out robust research before making their decisions.