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10 questions to ask before you make your first property crowdfunding investment
There’s a lot of excitement at the moment around property crowdfunding.
These figures have undoubtedly got a great deal to do with its rising popularity.
Property crowdfunding takes place via online platforms with a number of routes to enable investment into specific developments. They include buying equity in a holding company that acquires a portfolio of rental properties. Also, there are peer-to-peer lending sites, which effectively loan money to individuals looking to acquire properties. In equity crowdfunding, the platform operator creates a separate company, or special purpose vehicle (SPV) for each development opportunity.
The SPV is a legal entity created for one particular purpose such as a housing development. It’s usually set up as a private limited company in which investors can buy shares online, which will give them a share of the profit generated when the houses are built and sold. Then the SPV is wound up and the investor’s capital is returned, along with any profit.
So, property crowdfunding - on a high level at least - is easy to understand and easy to invest in. But, just because it’s so straightforward, that doesn’t mean that investors shouldn’t approach it with the same care as any other investment and ask themselves some hard questions.
1. How much money do you have available to invest?
Clearly you need to have the minimum investment that the crowdfunding platform requires. But what about beyond that?
Let’s assume you plan to invest £25,000 in property. Does that represent all your free capital and, if so, are you really willing to put it all in the one project?
As a basic principle, putting all your investment eggs in one basket is never recommended. Let diversification be your watchword. You should ideally put your money into a number of different asset classes other than property and, within property, consider spreading your money over a number of property JVs in different projects, in different types of housing and in different parts of the country.
For instance, it might not be a good idea to invest in another site in an area that’s close to your other investments. If that area takes some kind of economic or employment knock, then you’ll be protected if you’ve spread the risk geographically.
2. What’s the return that the developers are forecasting for this investment?
How does it compare with what you could earn on other property deals, or on other classes of investment? Does it beat them by a long way, in which case, how are the developers hoping to achieve that? If it does, then you should ask yourself: is the deal too good to be true?
When it comes to investing, never forget the old adage – if something looks too good to be true, it probably is. As an indication, according to the Kent Reliance Buy to Let Britain report, the average rental yield on a UK buy-to-let at the end of the third quarter of 2016 was 4.4%.
On the other hand, returns from property crowdfunding, such as JV property investments, can be more than 12%.
3. Have you read the small print?
Yes, it’s a bore, but it’s always to be advised.
Are there any fees associated with this deal payable to the platform, on investment or maturity, and have you taken them into account in calculating the net return you need?
If there’s anything you don’t understand, don’t be afraid to ask. Nobody ever lost money by asking questions. And, if there’s anything you don’t like, don’t be afraid to walk away and look at other options. No deal is better than a bad deal.
4. Don’t forget the tax man!
Is this investment going to have tax implications for you, such as capital gains tax and, if so, have you taken them into consideration?
If you’re not sure, ask an accountant or financial advisor. There are stories for investors to see much or all of their anticipated returns wiped out by an unforeseen tax bill.
5. How long do you want tie up your capital for?
Can you afford to leave it for 18 months to two years or however long the project is forecast to take, without seeing any return? Have you allowed for any unforeseen emergencies that might mean you have to get your hands on cash in a hurry?
6. Do you have confidence in the investment company and platform?
Do you trust the platform which is hosting the deal? Does it do any due diligence to vet the project? How long has the platform been around? Does it get any favourable or unfavourable mentions in the press or in the online media? Is it authorised by the FCA? Have you researched all of this? For a start, if the platform says it is FCA authorised, check that out on the FCA’s website.
7. How much do you know, or can you find out, about the site for the proposed development?
Is it in your area and are you familiar with it? Is there likely to be demand for the kind of homes being proposed? Is it in an area that is forecast to become popular, or has it been popular for some time, so that perhaps prices have peaked?
Are there plenty of jobs available in commuting distance or is a major employer shutting up shop? If the development is for executive family homes, are there good schools in the neighbourhood?
Ask yourself all the questions a prospective buyer would asking.
8. What do you know about the property developer?
How long have they been in business? Have they got a track record of delivering successful projects?
9. What do you know about the other investors?
If the platform is a co-investment platform where angel investors or institutions invest alongside ordinary retail investors, then it’s probable they’ve done some due diligence of their own and have satisfied themselves that the project is viable and likely to make a profit.
10. Is this the first deal you’ve looked at, or have you shopped around?
If this is the only deal you’ve really examined, then you’ve no reason to believe it’s the best one. Be choosy.
Property crowdfunding is an exciting way to invest. But don’t get carried away. Like any investment opportunity, always ask questions to make sure you're investing in the right opportunity for you.