Property Crowdfunding: a savvy investment strategy? Or, is it better to stay far from the madding crowd?

24 February, 2017

So, you have reached that distant point in your life where you have saved enough cash, and you are ready to invest in something. Maybe you already own your own home and want to invest in a buy to let property, but you don’t want to have the burden of answering unsolicited midnight telephone calls from your tenants about their broken boiler. Maybe you have saved a good amount of money, but it is still not enough to fund a property purchase on your own, when the house-price-to-income ratio in the UK is at a record high. Or, perhaps you have just won £10 on a scratch card and instead of buying that bottle of wine that is beckoning you from your local off-licence, you have the oh-so-sensible thought of investing your modest winnings on bricks (or should I say, brick) and mortar… Surely that is impossible?

 

It is called property crowdfunding; the new phenomenon that is set to change the UK property market over the next decade. This is how it works:

 

  • An investment platform (usually on the internet) advertises either a.) Undervalued but high rent yielding properties in areas that have not shown significant house price growth (for example Durham, Merseyside etc.); or b.) (Removing focus from rental income) properties in regions that are predicted to have high house price growth (for example properties within the Crossrail development). The properties can be commercial or residential.
  • You invest your £10, along with other people, into your chosen property inside a specially created limited company and voila! The limited company now own the property and you are the landlord of a buy to let property.
  • You receive returns from the rental income of the property, or even a capital sum from an ownership transfer, equal to the value of your share in the limited company.
  • For a 15% fee, the management company deals with the tenants so you don’t have to deal with that broken boiler. Instead, you are free to focus your energy on making other investments – slowly building up a diverse portfolio of small property investments around the UK.
  • So, what’s the catch?

    In a world of “over phishing” and scam artists regularly trying to part you with your hard earned money, this sort of investment platform is a breeding ground for fraudsters. Therefore, do your diligence on your chosen investment platform.

    However, even with the most popular and trusted platform, remember that it takes a lot of £10 scratch card winners to buy a property together. If the platform folds, it will be administratively complex to recover your share of the property along with the other thousands of other investors. Even then, you have to sell the house in the first place to recover your share, the legal transaction process usually taking between 3 and 6 months. Liquidity has never been an advantage of owning property and especially not with so many other joint owners. In addition, the multiple person ownership of the property would not be attractive to a prospective buyer.

    You will also have no control over the selection of your tenants, nor for the amount of rent that they will be charged. The management company deals with this as well as the management of the property. This lack of control means that, potentially, an irresponsible tenant could be placed in the property which means that there may be delays in receiving your rental income, and there could be extensive repairs that have to be made to the property after the troublesome tenant has vacated.

    In addition, be careful of the investment platform’s terms and conditions. Some platforms reserve the right to borrow against the property in certain situations. This could mean that your share in the property may decrease, and there is nothing you can do about it.

    Lastly; “What are the investment platforms gaining from this?” I hear you cry.

    Aside from the management fee, there is a “finder’s fee” which is 5% of property price. Then you are charged between 15-25% of the rental yield or any final capital increase in the property. So your £10 share may be more hassle than it is worth.

    However, despite the negatives, property crowdfunding could be a credible alternative to the traditional approach of property investment. It is a growing sensation in the crowd funding world, real estate accounting for more than [1]20% in the UK crowdfunding market – so it obviously works. However, the risk of not being able to be in complete control of your investment, and the costs of making that investment, might just be enough to stuff that £10 note back in your pocket.      

 

[1] https://www.propertyweek.com/data/real-estate-crowdfunding-poses-challenge-to-market/5086716.article