Property crowdfunding offers investors the chance to participate in the housing market without necessarily having the funds to buy a property outright. Investors buy shares in a company holding a property and potentially profit when the asset gains in value. Because many properties are let out, the property also has an income (provided tenants make timely payments), and investors get a share of this as well (the yield).
Investors are offered this opportunity by landlords who want to access investment so that they can expand their property portfolio quicker than they could otherwise.
Property crowdfunding can also refer to bridging loans, which are loans provided to a developer to help them finish developing a property. The loan is repaid plus interest once the property has been completed and sold. A bridging loan is a type of peer-to-peer lending; some platforms put bridging loans under their P2P investment section and some under their property crowdfunding section.
How Does Property Crowdfunding Work?
Landlords partner with a property crowdfunding platform to issue shares to investors. Typically, the platform forms a Special Purpose Vehicle (SPV) investment company to hold the asset. Investors then have the opportunity to invest in this company, for as little as £10. The company owns the property, but you as a shareholder have rights over how it is managed.
The platform usually signs up for a minimum term, holding the property for several years (normally two or three). During this time the stake in the building won’t be sold (except in exceptional circumstances), but you may be called upon to make decisions about how the property is managed.
The investors are paid a proportion of the yield of the asset (the rent) during the time they own it shares, and could also benefit from any capital gains when their shares are sold off (although the asset can also reduce in value).
Should You Invest in Property Crowdfunding?
When you invest in property crowdfunding your money is at risk, and you may lose your initial investment. To help you decide whether this form of investment is for you, we’ve compiled the advantages and disadvantages below; we’ve also provided a list of questions to ask yourself before investing:
Advantage – Invest in the Property Market
Traditionally, the property market has only been accessible to investors with a certain net-worth. Property is expensive, which means even if you can afford to invest in purchasing a property, your portfolio may be lacking in diversity: you are at increased risk if all your funds are tied up in one asset.
Property crowdfunding allows you to invest in the property market from as little as £10, which means it can become part of a diverse portfolio even if your budget for investment is small.
Advantage – Good Returns on Successful Investments
£100,000 invested in property in 1985 would have (on average) grown to just over £500,000 by 2014, a 5.7% annualised rate (source: thisismoney). In addition to the capital gain (the increase in the value of the property), you also receive a yield – your share of the rent paid for that property.
Together, these can make property crowdfunding a good investment, provided the housing market is moving in the right direction.
Advantage – Secondary Markets Available
Unlike equity crowdfunding, most property crowdfunding platforms do offer a secondary market. If you’re using one of these platforms, and you need to sell your shares, you can. This liquidity is useful in the event of an unexpected change in your financial situation.
Advantage – Protection Against Platform Going Out of Business
If the platform you are investing in goes out of business, you still own your share of that property. As a group, shareholders can get together and decide what to do with the property.
Disadvantage – Property Market Fluctuates
The big attraction of property crowdfunding is that you can invest in the housing market, but just like the stock market, the value of property can go down, as well as up. If the asset you have invested in goes down in value, then the amount you own is worth less, and you have a capital risk.
The properties seeking this type of investment are typically small and are vulnerable to fluctuations in the housing market, so this is a real possibility.
Disadvantage – No Tax Relief
Your property crowdfunding investment does not qualify for EIS or SEIS tax relief (which is often available for equity crowdfunding). Additionally, the company which holds the property is subject to corporation tax; this is deducted from funds before they are distributed among the crowd. You may also be liable for personal taxes on the income you receive; we advise you seek independent tax advice if you are unsure.
What About Bridging Loans?
When a property developer needs more funds to finish a property, they will either need a mortgage (which is often refused) or a bridging loan. This is a high-interest loan secured on the property, so if the investor failed to repay, they could lose their asset. As an investor, you have an opportunity to help fund these bridging loans and benefit from the high return they provide.
The platform may put in some cash for the loan and then offer the opportunity for investors to provide the rest. Return rates are high because it’s a high-risk loan (return rates of 12% are not unusual), although you are offered some protection (see below). The term of the loan is short, often 6-12 months.
Unlike property crowdfunding investments, the platforms offering bridging loans typically have a provision fund to help protect your investment:
Bridging loans are high risk; it is not unusual for a developer to go bust before completing a property and then be unable to sell the property and pay back the loan. In this situation, the loan can still be reclaimed as it is secured on the property, but the procedure can be a long and painful process.
Some platforms have provision funds: a central pot of money they can use to pay off investors if a loan defaults. The platform will then recoup the money from the developer themselves. This fund protects your investment and helps ensure you don’t have to wait for too long to get it back.
However, if enough developers fail at once (for example, a sudden dip in demand for housing means many developments remain unsold) the provision fund can run dry; it isn’t limitless. In this scenario, you may not get your money back as the provision fund won’t be enough to cover all the developers, and the fund may be unable to get back all the money. Even with a provision fund in place, there is always a risk.
Questions to Ask Yourself Before Investing in Property Crowdfunding
When you invest, your capital is at risk, so it is important that you make an informed decision. Before you consider investing, you might want to ask yourself the following questions:
- Can I afford to lose my investment (always ask this before investing)?
- Do I understand the risks involved?
- Have I diversified my investments (or accepted the higher risk for not doing so)?
- Do I understand the term of my investment (reasonably long for property crowdfunding, relatively short for P2P bridging loans)?
- Does my platform offer a secondary market?
- What level of protection does the platform offer?
Getting Started With Your First Property Crowdfunding Investment
OFF3R allows you to compare property crowdfunding opportunities from a wide range of trusted platforms. Before choosing an investment (or investments – it’s always good to diversify), you may want to research:
Please head over to the OFF3R property investments channel to compare the latest opportunities.
Risk Warning: Investing in property involves risks, including illiquidity (the inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of investment and dilution, and it should only be done as part of a diversified portfolio. Your capital is at risk.