Property crowdfunding

If you want to invest in a buy-to-let property or development project, but don’t have the funds, time or experience to invest in a single property, crowdfunding could be the answer.

But how does property crowdfunding work? And more importantly, what are the risks?

If you want to invest in a buy-to-let property or development project, but don’t have the funds, time or experience to invest in a single property, crowdfunding could be the answer.

But how does property crowdfunding work? And more importantly, what are the risks?

Mark Gordon
From the Mortgages team
10
minute read
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Posted 3 AUGUST 2021

What is property crowdfunding?

Property crowdfunding is a type of equity investment. Put simply, it’s a group of people who pool together to buy a share in one or more properties through a property platform.

The property platform manages the entire investment process – from finding suitable properties, right through to the day-to-day management of buy-to-let investments.

As a sole landlord you’d need to deal with the red tape and issues that come with managing tenants and a rental property, or pay someone else to do it for you. With property crowdfunding, the platform does all the legwork – you don’t even need to be an experienced landlord to invest. However, you do need to be an experienced investor as the risks involved are higher with this type of investment.

Done well, property crowdfunding could potentially offer a decent long-term investment with a steady income stream. On the other hand, like with all investments, you could end up with less money than you put in – and, at worst, you could lose all your investment.

There are two main ways to invest in property crowdfunding. Both methods have different types of potential return and quite different risk profiles and time frames. If you’re considering investing, you need to make sure you understand exactly what you’d be investing in, what potential upside and downside too.

1. Buy-to-let

You buy a share in a buy-to-let property, then the property is let and managed by the platform. The rental income minus fees is split between you and the other investors. So, if you buy a 10% share in the property, you’ll receive 10% of the rental income minus fees. Don’t forget there will potentially be periods – voids – between tenants where no income is coming in. Fees will include the costs that are involved in the purchase of the property as well as ongoing management fees and maintenance bills.

Buy-to-let is the most popular type of property crowdfunding. It’s generally a long-term investment where you potentially receive regular income.

2. Property development

You buy a share in a property development project – for example, building student flats. When the project is finished and the development sold, you and the other investors get a share of the profits. This is more of a short-term investment and can be riskier in an uncertain housing market: cost overruns can eat into profits, and the building may not sell quickly or for the intended value.

How does property crowdfunding work?

Property crowdfunding platforms can vary in their approach and structure, but they all tend to follow roughly the same process:

  • You sign up to the platform
  • The platform finds a property or development project investment
  • Each investor says how much they want to put in
  • Once the funds are gathered, the platform sets up a dedicated company called a Special Purpose Vehicle (SPV) to buy the property
  • Investors are given shares in the SPV company based on the amount they invested – so if you buy 10%, your share will be 10% of the SPV
  • If it’s a buy-to-let investment, the platform finds a tenant, collects the rent and takes over the day-to-day management, including property maintenance, just like a landlord
  • Investors receive their share of the rental income, minus any fees, in the form of a dividend

Each platform might work slightly differently, so you should make sure you understand the process before you sign up.

You’ll also want to take a hard look at how the company decides which properties to invest in.

If you’re not sure if investing is a good idea or not, you might want to consult an independent financial advisor or property expert.

Did you know?

Properties in the UK can usually only have up to four people on the title deed. That’s why crowdfunding platforms set up SPVs for every property they buy. Technically, you’re buying shares in the SPV, not the actual property. As an SPV can have hundreds of shareholders, a whole crowd of people can each have a share in the same house.

What types of property can you crowdfund?

All sorts of property investments can be bought through crowdfunding, for example:

  • residential properties
  • commercial properties
  • student flats
  • housing developments

You can choose to buy shares in just one property, or split your investment between multiple properties or development projects. Or you might want to build up a portfolio of different types of properties – both commercial and residential – in different regions, rather than putting all your eggs in one basket.

What’s the minimum amount you can invest in property crowdfunding?

It depends on the platform, but most want a minimum investment under £1,000. Some will even accept as little as £100 to get started. When you consider that the deposit for a buy-to-let mortgage can range anywhere from 20% to 40%, the upfront investment for property crowdfunding is hardly anything.

How did property crowdfunding become so popular?

Historically, bricks and mortar has always been a solid investment. But the opportunity to invest in real estate has only really been available to those with access to large pots of money. Buy-to-let investments have boomed over the last 20 years with many landlords benefitting from a decent rental income and capital growth.

But recent tax regulations mean that buying-to-let isn’t as profitable as it once was. For some, the whole process of owning and managing a buy-to-let property just isn’t worth the stress or expense.

Crowdfunding, on the other hand, is a new way of investing that hadn’t previously been as easily available. Thanks to online platforms, UK property investing is open to everyone. People who don’t have the time, experience or money to buy a rental property outright now have the chance to invest in the property market without the hassle of being a hands-on landlord. However, you’ll pay management fees for someone to do that work for you instead.

And with the potential to yield higher returns than traditional savings accounts, it’s easy to see why property crowdfunding is growing in popularity. But before you get carried away with the idea of becoming a property magnate, remember the Financial Conduct Authority (FCA), the UK’s financial regulator and watchdog, considers crowdfunding a high-risk investment. Its advice on crowdfunding is that ordinary investors should take care and “you should only invest money you can afford to lose.” It suggests you should not put more than 10% of your net investable assets into crowdfunding.

What are the returns like?

Returns could be made up of:

  • rental income after expenses, which can be paid monthly, quarterly or annually, depending on the platform
  • capital gain when the property is sold (if you still own a share in it)

The returns you’ll get can depend on the type of property you invest in. For example, house shares with multiple occupants and student flats can often produce a higher rental income than a property with a single tenancy agreement, like that of a family. On the other hand, the family home might have more potential for higher capital growth.

You also need to take into account empty periods between tenancies or a refurb, which can mean little or no rental income for short periods. The fees charged by the platform for managing the property will also put a dent in your returns.

Like with any kind of property investment, predicted returns from property crowdfunding platforms are never going to be 100% accurate. That said, some of the best-known platforms claim potential net returns of between 2.5% and 7.5% per year although this is not guaranteed.

How do you invest via property crowdfunding?

Investing through crowdfunding is simple and quick.

  • Choose your platform – make sure it’s FCA regulated
  • Sign up
  • Once you’re registered, you can start looking at properties or development projects to invest in
  • Decide how much you want to invest
  • Start investing within minutes
  • The platform takes care of the rest – you can monitor your investment or sit back and forget about it until the potential returns come in

What are the pros and cons of property crowdfunding?

While property crowdfunding may seem impossibly easy and too good to be true, like any kind of investment, it’s not without risks. Let’s have a look at the pros and cons of property crowdfunding:

Pros:

  • Almost anyone can invest as long as they have a small amount of money
  • You can invest as little as £100
  • The process can be much quicker than the traditional way of searching and buying a property
  • You don’t need experience
  • You can spread your investment over a number of properties
  • It’s an armchair investment – you don’t have to worry about tenants, rent collection, landlord responsibilities or the day-to-day tasks of property management
  • Can potentially offer better returns than a typical savings account

Cons:

  • Property prices could fall, and the value of your shares could go down so you could lose some or all of the money you invested
  • While you don’t have to do the hard work of being a landlord, you’ll have to pay someone else such as a management company to do it for you, with fees and charges eating into potential profits
  • Empty periods between tenancies mean no rental income during that time
  • You’ll only be able to sell your shares if someone is willing to buy them
  • You don’t get a say in when the property is sold
  • Returns can be unpredictable – you might not get the steady flow of income from dividends you were hoping for and there is no guarantee of receiving any income
  • Crowdfunding platforms aren’t covered under the Financial Services Compensation Scheme (FSCS) so you won’t get automatic compensation if they go bust. This means that if the platform fails you could lose some or all or your money.
  • Property crowdfunding platforms are still fairly new, so they don’t have enough of a track record to show how safe or profitable they are in the long-term
  • You have no control of the property or a say in how it should be managed
  • You don’t get to see the property, so you can only rely on the information the platform gives you and you can’t be sure that the information is reliable – if the property has major problems, it could turn out to be a bad investment
  • You might be locked in for a certain length of time and unable to cash in your investment at all. With platforms that will allow you to do this you may be charged an early exit fee
  • You don’t get any of the tax reliefs associated with buy-to-let

In terms of the property market in general, on the one hand, house prices in some areas have seen rapid growth. On the other, recent years have seen the property market facing a variety of difficulties. There’s also the worry that platforms could potentially offer riskier investments in slow times – just to have something to offer potential customers.

Frequently asked questions

How can you exit your investment?

If you decide to exit your investment you may have to wait for the crowdfunding platform to find another shareholder who’s willing to buy your shares. You can set your own price, so if you’re in a hurry, you might get a quicker sale by offering a discount.

Be aware that selling could take time so don’t expect an instant exit. It could take weeks or months to find someone who’ll buy your shares, or for the property to be sold.

What are the fees for property crowdfunding?

Fees will vary between platforms, but typically include:

Make sure you check what fees are involved before signing up to a platform, so you know exactly what you’re paying for and how it can affect your returns.

Is property crowdfunding right for me?

If you’re looking to invest in property but lack the funds to buy your own buy-to-let, property crowdfunding could prove a good investment. And if you’re happy to invest, then let someone else take over the management side and do the rest, it could work well.

But if you want to own a property outright and have the funds to do so, you’ll get far more satisfaction, not to mention returns, by going it alone. If you don’t want the everyday hassles of being a landlord you could always hire a letting agency or property management company to do the legwork for you.

Don’t forget that property crowdsourcing is an investment that can go up or down, so you could get less back than you invested. If you’re looking for security and a guaranteed stream of income, then it’s probably not the right choice for you.

It can be a useful way of spreading your money between different types of investment. Remember, the FCA suggests you should not put more than 10% of your net investable assets into crowdfunding, and the highs and lows of the property market don’t generally coincide with the peaks and troughs of the stock market – so it can be a way of putting your cash into different types of assets. However, crowdfunding platforms are new and have no long-term track record of producing the results they promote.

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