Property crowdfunding promises to solve the two biggest disadvantages of normal buy-to-let investment: the initial money needed to purchase a property, and the considerable amount of time spent managing the property. The property crowdfunding sector has undergone a lot of change over the past decade, becoming a multimillion-pound industry. But does property investment crowdfunding deliver? And how does it work?
What is property crowdfunding?
Put simply, property crowdfunding is when a group of people gets together to buy a single property asset, with each of them owning a percentage.
If you got together with a few friends to buy 25% of a property each, you could call that crowdfunding. Usually though, in property, crowdfunding refers to when an online platform brings a large number of investors together and manages the whole investment process for them.
A huge benefit of property crowdfunding is the fact that you can invest in property with far less money than you’d need to buy a buy-to-let property on your own.
What’s the difference between property crowdfunding and peer-to-peer lending?
These investments are often lumped together, but there’s an important distinction to make between property crowdfunding and peer-to-peer lending:
Property crowdfunding is a form of equity crowdfunding; it’s just like owning a property yourself, except you only have a small share of it.
By contrast, peer-to-peer lending puts you in the position of being 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.
In essence, peer-to-peer lending is a short-term loan that just happens to often be secured against property, whereas property crowdfunding is, usually, a long-term investment, wherein you do own a part of the property.
Are you crowdfunding property development or buy-to-let properties?
The most common form of property crowdfunding is just like buy-to-let, so property is bought and rented out, and that rental income is split between all the different owners.
But there’s also property development crowdfunding, wherein you buy a share of a development project such as building a new scheme of houses or converting an old warehouse into a block of flats. When the project is finished and sold, the profit is split between all the different owners.
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.
The development model is a short-term investment, usually less than two years, in which all the profit is made in one go when the property is finished and sold. The returns can be higher, but they’re a lot more unpredictable as developments are risky, and the projected profits can be much lower than planned, or there can be no profit at all.
It’s vitally important to be crystal clear which type of property crowdfunding you’re investing inas development crowdfunding, regular property crowdfunding, and peer-to-peer couldn’t be more different in terms of risk profile, timeframe, and potential upside. They all involve property as the underlying asset, but that’s about the only similarity.
However, the majority of property crowdfunding platforms mix at least two of these types, sometimes all three. On some platforms, they’re in separate sections of the site, but sometimes they’re all mixed together in the same list. When looking at one of these sites, make sure you’re clear on exactly what you’re interested in and make sure that’s what you’re looking at.
How does property investment crowdfunding work?
Each property crowdfunding platform in the UK has a slightly different angle and structure, but the basic model is usually the same.
The crowdfunding platform identifies a suitable property – whether it’s a single house, a selection of flats in a block, or an entire block. Investors say how much they want to put in until the purchase is 100% funded. The platform forms a dedicated company (Special Purpose Vehicle, or SPV) to buy the property, and investors are given shares in the company proportional to the amount they contributed. The platform then finds a tenant, collects the rent, and manages the running of the building and maintenance. The rental income, minus expenses, is paid out to investors, proportional to the amount they invested, in the form of a dividend.
Before investing you should read the process of the specific platform you’re interested in carefully, but it will normally be a close variation of this model.
So, when it comes down to it, you actually own shares in a company that owns a property, not the property itself.
The distinction hardly matters, it’s just a simple and practical way of managing hundreds of different owners. However, it does make a difference in how you report your income and pay tax on it.
What happens once you’ve invested in a crowdfunded property?
The advantage of property crowdfunding is that it’s 100% hands-off as the crowdfunding platform takes care of everything, or more accurately, they employ a managing agent who takes care of everything.
The crowdfunding platform might also take a fee to compensate them for managing the managing agent.
Property crowdfunding returns: what can you expect?
The most important thing to note about property crowdfunding returns is that nobody knows exactly what they’ll be. That’s the nature of equity investment, the platform will give their best guess about what the outcome will be, but it’s impossible to predict the future with total accuracy.
Just like any type of property investment, returns from property crowdfunding come in two forms:
Either recurring profit from rental income minus costs, which might be paid out monthly, quarterly, or annually depending on the platform.
Or a capital gain when the property is sold.
If you prefer to hand-pick your properties, they may offer a net rental return, after costs, of anything from about 2.5% to around 6%, but in reality, it could be less. You could make a loss in a particular year, or even overall. Equity investments, including property, are inherently uncertain and are subject to a number of factors, both internal and external to the industry.
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