Have you heard of property crowdfunding before?
What about product or business crowdfunding?
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.
What 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.
What 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 other investors.
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.
How 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 holding.
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 for.
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.
How 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.
Is 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.
What 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 costs.
2. A capital gain when selling the property.
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 investment.
Can 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.
Advantages 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 yourself:
- You can become a property investor with a lot less money than you would with conventional property investment
- You are able to diversify your investments across a lot more properties rather than speculating on a single property
- 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 for real)
- 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 first.