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Crowdfunding as a property investment

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What is Crowdfunding?

Crowdfunding is a form of collective financing i.e. a collaboration of people who are using their own money to support the efforts of an organization in the hope of making a financial return on their investment.  The theory is that because the numbers of people collaborating in the investment is significantly large each individual need contribute only a relatively small amount.

In terms of the property market an investor can put as little as £500 into a scheme but be part owner of a multi-million pound property portfolio (although some schemes require a minimum investment of £10000).

A good property Crowdfunding scheme will make it possible to build up a portfolio while sharing ownership, profits, costs and risks without having to invest a hefty deposit, get involved in the search and purchase process, or commit to large amounts of mortgage debt.  Such a scheme will:

  • State a clear price for each opportunity, including legal fees, purchase taxes and set-up fee (which can be 5% or more of the sum invested),
  • Define the minimum term and exit plan and
  • Manage the investment on behalf of investors.

Investors will normally get to keep 100 percent of the rental income and on the sale of the property a full return of their invested funds plus an agreed percentage of any profit (typically 50% to 75%).

What size is the market?

There are currently 25 firms operating crowdfunding schemes in the UK and a further 10 or so are seeking approval from the Financial Conduct Authority (FCA).

The FCA recently updated their regulations in respect of this relatively new form of investment and were openly critical of the “lack of balance” of many crowdfunding websites which they felt were too biased towards the benefits and not open enough about the risks involved.

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What are the Risks?

The main risks are the same as with any property-to-let investment:

  1. Poor rental return if property proves unpopular and the rental value falls
  2. Long periods without a tenant or tenant defaults on rental payments (means no income during those periods)
  3. Value of property falls
  4. Major structural problems occur involving considerable repair costs, extended period of no rental income and/or drop in value.

In addition it may be difficult and expensive to get a return of monies if there is a need to cash in before the agreed term (which can be 5 or more years).  So far, only one scheme offers investors the option of selling their shares direct to the market rather than back to the scheme to sell on your behalf (at a charge of 2% or more).

There is also the risk that if the scheme goes bust some or all of the monies invested will be lost or tied up for a long period – all schemes regulated by the FCA are required to ring-fence client money in a single company set up to own only one property.

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What are the potential benefits…

If the scheme works it can produce significant financial returns for reasonably small amounts of investment.  A two bed flat bought in Fulham 2009 would have sold last year for around 90% more than the purchase price and would have produced a rental yield of over 6% in the interim.  The average rental yield appears to be focused on a target of around 4.5% and most schemes target purchases which require some form of regeneration to ensure decent capital growth.

…and downside?

Apart from the risks the main downside is the lack of control an individual investor has over key decisions such as

  1. How much rent to charge
  2. Selection of tenants
  3. When to sell
  4. How to finance any major repairs (schemes may deduct the costs from investment returns or fund the cost by borrowing against the property and thereby reduce the amount of profit available for re-sale).

The FCA advise that “You should only invest money that you can afford to lose”.

Feedback

If you would like to share your opinion on this form of investment or any direct experience you may have of crowdfunded investment then we would love to hear from you.

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