The Ultimate Guide To Property Crowdfunding

Property crowdfunding is when a group of people decide to collectively buy a single property asset, so they each own a small share.

For example, if you decided with friends to buy 25% of a property each, you could call that crowdfunding. However, it usually refers to when an online platform is used to bring investors together and facilitate the process.

Property crowdfunding can solve two key disadvantages of normal buy-to-let investment which are having the money and time to buy and manage it. But if you’re wondering how it works and whether it’s for you, then here’s our guide to help you make your mind up.

What’s The Difference Between Property Crowdfunding And Peer-To-Peer Lending?

Essentially with peer-to-peer lending, you own the debt and it’s a short-term loan that is often secured against a property, but you don’t own the property in any way. With property crowdfunding, you own the equity and it’s usually a long-term investment, where you do own a piece of the property.

In broader terms, property crowdfunding is a form of equity crowdfunding: it’s just like possessing a property yourself, excluding the fact you only have a small share of it. In comparison, peer-to-peer lending means you act like the mortgage company: you lend money so someone else can buy or develop a property. They then pay you back by selling the property or refinancing it with a mainstream lender.

What’s The Minimum Investment Required In Property Crowdfunding?

A key advantage of property crowdfunding is you can invest in property with far less money (as small as £100 in some instances). In comparison, buy-to-let requires at least £20,000 to buy even at the lowest end of the market.

Be Clear On What You’re Crowdfunding

A typical form of property crowdfunding is just like buy-to-let: a property is bought and rented out, and that rental income is divided between all the different owners. Property development crowdfunding in comparison, is where you purchase a share of a development project and when the project is completed and sold, the profit is divided between all the different owners.

The development model is a short-term investment, normally less than two years, where all the profit is made in one go, when the property is finished and sold. The returns can be higher, but the developments can be risky, and the projected profits can be much lower than planned.

The buy-to-let model is a long-term investment that aims to produce a stable income stream with some additional capital growth over time.

How Does Property Investment Crowdfunding Work?

The basic model of UK property crowdfunding platforms is very similar, despite their different appearances and structures. Normally, the crowdfunding platform identifies a suitable property and investors then state how much they want to put in until the property is fully funded.

A dedicated company (Special Purpose Vehicle, or SPV) is then formed to buy the property and investors are given shares in the company relative to the amount they paid. The platform then finds a tenant, collects the rent, and manages anything that needs to be done.

The rental income (minus the expenses) is then paid out to investors, proportional to the amount they invested, in the form of a dividend. Essentially you end up owning shares in a company that owns a property, not the property itself.

What Do Property Crowdfunding Returns Look Like?

By nature of the fact it is an equity investment, no one can say exactly what your profit will be: the platform will give their best guess, but it’s impossible to be totally accurate.

Returns from property crowdfunding come in two forms: monthly profit from rental income minus costs or capital gains when the property is sold. Monthly profits might be paid out quarterly or annually rather than monthly, depending on the platform.

With property crowdfunding, everything is taken care of by the managing agent, which charges a fee. The crowdfunding platform might also take a fee to compensate them for managing the managing agent.

Investing this way can be risky, so make sure you’re fully aware and comfortable with what you’re doing. Here we assess its benefits and pitfalls further so you can evaluate whether it’s for you.

What Are The Different Types Of Property Crowdfunding?

There are several types of crowdfunding.

Firstly loan-based crowdfunding is where you lend money to individuals or companies in return for a set interest rate. It’s also called peer-to-peer or peer-to-business lending (P2P or P2B).

Investment-based crowdfunding is where you invest in a business and receive a stake in return – this is normally shares.

Reward-based crowdfunding is where you give money in return for a reward linked to the cause or project you’re supporting.

Finally, donation-based crowdfunding is where you donate to a person or a charity (you may be promised something in exchange).

Neither donation nor reward-based crowdfunding are regulated by the Financial Conduct Authority, but loan and investment-based crowdfunding are.

What Are The Risks Of Property Crowdfunding?

  • The risks of property crowdfunding are broadly the same as investing in property on your own, but given the fact it is a relatively new concept, it can be risky.
  • You should take into consideration the risk the business you invest in going into administration. Many new businesses fail in the first few years, so you could lose all your money. The property might also sit empty, not producing rental income.
  • Another risk is the crowdfunding platform itself going bust. This could mean you lose money if you’d paid the crowdfunding website but it fails before your money was invested with the business.
  • The return is also not guaranteed in crowdfunding. The shares may not rise in value and you may not receive any dividend payment (a share of the profits).
  • There might be lots of repairs that increase the expenses
  • It may also be hard to sell the shares. The shares are normally unlisted, which means you may not be able to sell them easily in the way you could sell shares in a big company that’s listed on the stock market.

Reducing The Risks Of Crowdfunding Investments

One technique to reduce the risk of crowdfunding investments is to only invest money you can afford to lose. You must invest no more than 10% of any money you have available for investing in any one year.

Remember, donation and reward-based crowdfunding platforms are not regulated by the FCA, so before you invest any money using an investment-based crowdfunding platform, check the Financial Services Register to make sure it is authorised.

The money you invest should be kept in a distinct account to the crowdfunding website’s own bank accounts before it’s passed over to the business.

However, crowdfunding websites have limited protection under the Financial Services Compensation Scheme, so you may be able to claim compensation from them if the site goes bust.

What Are The Tax Benefits Of Crowdfunding?

Two key schemes offer tax breaks for investing in small companies: the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

Both schemes let you offset a slice of the amount you invest against your tax bill and any profits are free of tax. There are conditions, however; for example, you must keep your investment for a certain period of time to quality.

What UK Property Crowdfunding Sites Can I Use?

Here are just a few samples:

The House Crowd
Property Partner
Property Moose
Yielders

When you’re choosing a platform to invest with, consider the type of investments they offer, and whether they meet the criteria you’re looking for.

Also consider their track record of success, what fees they take, and at what point in the process. For example, there might be an initial fee, an annual management fee, a share of the capital growth they take or more than one of the above.

Advantages And Disadvantages Of Commercial Crowdfunding

Advantages

  • The advantages are you can get exposure to property with much, much less investment and because of this, you can diversify your investment across far more properties and avoid having all your eggs in one basket.
  • You don’t have to worry about tenants, rent collection, repairs or council tax with crowdfunding and the buying process takes up much less of your time.
  • Depending on the platform, you can potentially sell your investment more easily and more quickly. You can still invest even if you can’t easily qualify for a mortgage.

Disadvantages

  • Your returns will possibly be less than owning directly because there are more fees involved and you’re not using leverage; you also don’t have any control over the management of the property.
  • It’s worth considering that you usually don’t have total control over whether the property gets kept or sold and you might be locked in for a set period of time.
  • Lastly, no crowdfunding platform has a long enough track record to really know what the results will be

What Are The Risks Of Property Crowdfunding?

Similar to investing in property on your own, the risks are largely that the value of the property might fall, the property might sit empty, not producing rental income and there might be lots of repairs that increase the expenses

With property crowdfunding, you’re adding an extra risk: platform risk, which means you’re totally reliant on the crowdfunding platform to manage the investment and not collapsing itself.

Crowdfunding is new enough that no platform has an extensive track record, but it would be sensible to stick with the more established players and feel more confident.

How Can You Exit Your Investment?

Property Crowdfunding is generally easier to exit than normal property investment, which is highly illiquid: if you decide you want to sell a property, it can take months even in an active market with plenty of buyers and can involve dealings with estate agents and visits to solicitors.

With property crowdfunding, these complexities are largely removed, but that doesn’t mean you can sell instantly at any time, it could take weeks or months for you to find a buyer for your shares, or for the property to be sold. It’s worth noting the process differs between different crowdfunding sites too.

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