Have you heard of property crowdfunding
What about product or business
If you don’t know what crowdfunding is then
please read on. The concept is pretty simple and it is growing in popularity
all of the time. Now it is available for property investment and it is
something that I have been taking a serious look at recently.
In this post I am going to use the example
of a buy to let property investment. The two main problems with buy to let
investments in the UK (and elsewhere) are:
1. You need a fair amount of money as a
down payment for a property
2. It usually takes a lot of time to find
the right property and then purchase it and manage it.
The aim of property crowdfunding is to
overcome these two problems. Does it work? Well by the end of this post you
will know the answer to that question.
Exactly is Property Crowdfunding?
The concept of property crowdfunding is
simple. It is all about a number of people purchasing a property and then
owning a small share of the asset. There are online crowdfunding platforms that
enable you and others to do this.
If you and four others decided to invest in
a property equally then you would all end up with a 20% share of the asset.
This is similar in principle to property crowdfunding. The real difference is
that the property crowdfunding platform can bring a large number of investors together
and it will manage the entire process.
is the Minimum that you need for Property Crowdfunding?
Here is where the concept gets really
interesting. Instead of having to find a hefty deposit for your own buy to let
property you can invest a much smaller amount of money alongside a number of
The minimum amount depends on which
property crowdfunding platform that you use. It is likely to be between £100
and £1,000. Let’s face it these are really small amounts when you consider the
deposit that you would need for your own buy to let property even at the really
low end of the market.
do you make money from Property Crowdfunding?
The reason that I chose the buy to let
property investment example is because it is very simple to understand. If you
purchased your own buy to let property then you would rent this out to tenants
and derive income each month from your investment.
With property crowdfunding in the buy to
let space the rental income is split among the investors in accordance with the
share of the asset that they hold. So if you have a 10% share of the property
asset you will receive 10% of the rental income.
An alternative to buy to let property
crowdfunding is property development crowdfunding. With this you would invest
in a specific development project and then when the development is completed
and sold you will receive a share of the profits in line with your asset
The obvious difference here is that the buy
to let investment crowdfunding is long term and the property development
crowdfunding is short term. With the buy to let example you have the chance to
earn passive income at a good return on investment over time.
You need to decide what kind of property
crowdfunding you want to get involved with. I would recommend buy to let but
you could choose normal property crowdfunding where the investors purchase a
property to flip it for short term profits or development crowdfunding. The
latter two are riskier because you can never be sure what a property will sell
Most of the UK property crowdfunding
platforms will enable you to choose which type of investment that you want to
make. Often you will find a separate section for buy to let which makes things
easier. But you may find that all of the different types of investment end up
in a single list so you will have to find what you want.
do you participate in Property Crowdfunding?
The principle of property crowdfunding is
the same whichever platform you choose to use. Sometimes they will have a
different structure or even use an angle which is a little different but the
concept is always the same.
When you log in to the platform it will
identify a suitable property for you to invest in. If you are interested then
you need to specify how much you are willing to invest. All property
investments have to be funded 100%.
With buy to let investments the
crowdfunding platform creates a dedicated SPV (see my post on SPV’s here) so
that the property can be purchased. As an investor you will be provided with
shares in the SPV that are directly proportional to your investment amount.
Tenants are found by the crowdfunding
platform and they will collect all rents and take care of all of the
management. The rental income generated is divided between the investors
depending on their investment level by way of dividends. The platform will
deduct fees from the rental income.
It is very important that you read how the
process works for any property crowdfunding platform. You will probably find
that the details do not vary much between different platforms but it is
essential that you understand everything.
Property Crowdfunding Hands Off?
Yes it is, which is one of the reasons that
I am so interested in it. If there is a problem at the property that you have
invested in you will not experience the platform asking you for a contribution
to fix the issue. They will pay a managing agent to deal with the problem and
pay them. The platform will often charge a fee as well.
The money for this will come from the SPV
and it will affect your dividends but if you think about it you are not getting
a bad deal here. If you were the sole owner of a buy to let property then you
would have to pay the whole cost of fixing any problems and spend the time to
ensure it was all done properly.
kind of returns can you expect?
The platform will provide you with an
estimate of the likely return you would make on a buy to let investment but
this will be a “best guess”. There are no guarantees with property crowdfunding
just as there are none with conventional property investment.
You are basically looking at two returns on
your investment with buy to let:
1. The monthly profit from renting less any
2. A capital gain when selling the
Rather than taking a complete chance on
this you can go for a “balanced plan” where your investment splits between a
number of different properties. One of the leaders in this field is Property Partner.
With their balanced plan they aim to
provide you with a return of around 7.5% a year. Half of your return comes from
the profit on monthly rental and the other half is from the potential capital
gains when properties sell.
If you want to go it alone and just choose
your own buy to let property to invest in through crowdfunding then you are
likely to see a return from rental income less costs of between 2.5% and 6%.
These are the numbers that I have identified by looking at recent examples. It
is anyone’s guess what the capital growth might be.
You need to proceed with the same caution
that you would with a conventional property investment. There are always risks
and the reality is that you could even make a loss at certain times during your
you exit a Property Crowdfunding Investment?
Indeed you can and it will normally be a
lot faster than if you had purchased your own buy to let property. To exit out
of your own buy to let investment you will need to sell the property and this
can take a long time even if the market is active and there are a lot of
potential buyers. Selling properties is always stressful too.
If you are a property crowdfunding investor
then you can just make a few clicks and you can exit your investment. Does the
exit happen instantly? No it doesn’t but most platforms have a feature called
the “secondary market” where you can sell your investment to another investor.
It can take a long time to sell your
investment to another party just as it can selling a buy to let property. The
major advantage here is that you do not have to deal with the stress of selling
a property – everything is done for you.
and Disadvantages of Property Crowdfunding
OK so now that you know what property
crowdfunding is compared with conventional property investment is it worth
going for? Take a look at these advantages and disadvantages and decide for
- You can become a property
investor with a lot less money than you would with conventional property
- You are able to diversify your
investments across a lot more properties rather than speculating on a single
- Property crowdfunding does not
consume a lot of your time
- You do not have to deal with
finding tenants, collecting rents, managing repairs and compliance issues
- You do not need to qualify for
a mortgage to be a property crowdfunding investor – it is open to most people
- You have the option to sell
your investment on a number of the platforms
- The returns you make through
property crowdfunding are going to be lower than what you would make purchasing
your own buy to let property because there are additional fees involved (from
the platform) and you cannot use leverage
- You can never be completely
sure what kind of property you are investing in (you won’t be able to see it
- The management of the property
is totally out of your control
- You have little control or none
at all over whether to sell the property or hang on to it
- You have no influence over how
much a property is sold for
- Property crowdfunding is
relatively new so there is not a lot of historic data to look at
At the end of the day if you like the idea
of hands free property investment then property crowdfunding could be a good
option for you. It could also work for you if you want to invest in property
but do not have the money for a deposit or have problems getting a mortgage. As
with everything related to property investment you need to do your homework