People coming together to invest in property is nothing new. It’s a way of sharing the risk - and sharing the returns. Because people pool their money with others, it can offer a low-entry way in to the world of property investment.
And that is why property crowdfunding platforms exist, to harness the combined power of a pool of like-minded individuals to build a diversified property portfolio without having the upfront and ongoing costs (and often hassle) associated with being a landlord.
Also known as P2P (peer to peer) property websites, typically everything is transacted and managed online (though reputable platforms will also have a landline telephone number displayed onsite for any questions).
How do P2P property platforms work?
The way the crowdfunding property platforms operate may differ, typically however, it works something like this:
· You view the website and choose a property / development you want to invest in
· There will be a minimum and maximum amount you can invest
· Once you have invested your money, you typically will receive either:
· a monthly repayment of your capital, along with interest
· a share of the proceeds when the property is sold
· if the property is to be tenanted, share of the rental income after deductions.
Some P2P property lending platforms will work with developers who require funding, so you are investing in a new or renovated development. Others will invest in existing properties – including some that may already be tenanted.
Is my money safe?
While different equity property crowdfunding platforms may work in slightly different ways, all UK operations must operate under Financial Conduct Authority (FCA) regulations, giving peace of mind to a potential investor.
Do note, however, that property crowdfunding is not covered under the Financial Services Compensation Scheme. This means, as with any type of investment, you do need to be aware of any financial risks involved.
Making an informed decision
As equity property crowdfunding platforms do vary in terms of how they operate, it is important that you understand exactly how the individual platform - and how your particular investment - will work:
Make sure you check how the property crowdfunding platform carries out their due diligence on properties and people looking for funding (such as developers)
Check how much of the property crowdfunding platform’s own money is used for each investment
Understand what the steps are if a developer/tenant defaults on making their repayments – does the property crowdfunding platform have a dedicated team in place to tackle bad debt?
· Are you happy with the level of risk to which you will be exposed?
· Does the investment offer what you believe is value for money after charges / fees, taxes and allowance for defaults have been accounted for?
· How quickly can you access your investment if you need it?
· And so on.
Why are crowdfunding websites becoming so popular?
There are a multitude of reasons as to why property crowdfunding platforms have taken off in recent years:
They enable you to invest in bricks and mortar with a relatively small cash amount – so you can ‘dip your toe’ in the world of property investment to see if it is an appropriate way of investing for you.
You will have none of the hassle - or costs - associated with being a landlord of your own property (such as a mortgage deposit, solicitors’ and surveyors’ fees, ongoing property upkeep and dealing with any domestic property problems)
With savings interest rates so low, people are looking to alternative investments to make their money work harder for them.
Property crowdfunding is typically an easy way to get in to the buy to let property market
The purchasing power of the platform means they are likely to get bigger incentives / discounts when buying properties – the cost savings which you then benefit from.
They provide the opportunity to put small sums of money in multiple properties – so you can spread your risk and invest in different regions, where property values may fluctuate.
Is property crowdfunding suitable for me?
In the UK, investing in bricks and mortar (typically in the longer term) has long been universally recognised as a way to enjoy capital growth - even in the face of a recession.
With property prices stable and steadily growing (the Nationwide House Price Index September 2016 showed that prices increased by 0.3% month on month as well as 5.3% annually), now may be the time to consider investing in property crowdfunding.
As with all financial decisions, what is suitable for you may not be suitable for someone else. Remember, property investment is not a fail safe way to make money – it comes with risks - so you do need to fully understand what you are investing in, the terms and conditions of the agreement, plus be prepared to, in the worse case scenario, lose everything you have put in.
FJP Investment is a team of investment specialists sourcing a wide range of investment opportunities both in the UK and overseas. Products include the recently launched Bar Works investment.