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A question to ask before making a property crowdfunding investment – plus 12 more
Property crowdfunding has been a somewhat natural product of the development of the internet and fintech.
Online platforms have set up, which allow large numbers of investors to invest together through crowdfunding. These platforms, registered with the Financial Conduct Authority (FCA) and complying with its standards, bring the investor and investee together. They have been popular with startups and startup investors and the property sector has followed.
Property crowdfunding sites use various ways to enable investment into specific developments. They include buying equity in a holding company that acquires a portfolio of rental properties. A separate company is created for each investable opportunity. Earnings are related to rental income and property value rather than business performance.
But before anyone makes a property crowdfunding investment, the first question they should ask themselves is 'have they looked at alternative ways of getting into the property market?'
Buy-to-let was a popular way of investing in property for many years with low interest rates and rising property prices. Eventually the government feared the market was getting out of hand and stepped in to cool things down with a stamp duty hike, restricted tax relief on interest payments and tighter regulation on mortgages.
Property expert Savills argues that these measures have already led to a steep fall in those buying investment properties with mortgages and that the decline is likely to continue.
It is, of course, still possible to buy or build a property yourself and sell it. A lot of people have made money out of this kind of direct property investment, but it’s not recommended for the inexperienced. It calls for a knowledge of the building trade and property market and a readiness to have capital tied up for a long time.
An alternative is to buy into a property fund which buys shares in companies that are engaged in the sector, usually a Real Estate Investment Trust (REIT). A danger with these is that when there’s a rush of people trying to get their money out, as they did following the Brexit referendum in 2016, it takes time for them to raise the cash needed to meet call for payments because properties – unlike shares – can’t be sold instantly. In 2016, property funds run by Standard Life, Columbia Threadneedle, Janus Henderson, M&G, Aviva and more actually suspended withdrawals.
If, having looked at these options, you’ve decided that a property crowd fund investment is the road you want to go down, then there are another 12 questions you should address in order to decide which is right for you.
- How much money do you want to invest? Do you have the required minimum investment? If it’s £10,000, does that represent all your free capital and are you willing to put it all in the one project? Generally putting all your investment bags in one basket is a bad idea, so do you spread it over a number of property crowdfunding investments, or put some of it into another class of investment altogether?
- On the subject of diversification, is this your first property deal? If you have one or more current property investments, then it might be wise to avoid investing in another site 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.
- What return are the developers offering? Does it beat 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, is the deal too good to be true? Always remember – if something looks too good to be true, it probably is.
- 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?
- Is this investment likely to have tax implications for you, such as capital gains tax and, if so, have you taken them into consideration in calculating the return and in comparing it to alternative investments?
- How long can you afford to have your capital tied up? It might typically be for 18 months to two years without seeing any return, but perhaps your investment strategy calls for a longer term home for your money.
- How much do you know about the site of the development? Is there likely to be demand for the kind of homes being proposed? Is it in an area that is rising in value or has it been popular for some time, so that perhaps prices have peaked? Has there been a new commercial development likely to create jobs in commuting distance?
- 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?
- How much confidence do you have in the property developer or builder? How long have they been in business? Have they got a track record of delivering successful projects?
- Who are the other investors? Do they include angel investors or institutions? If so, it’s probable they’ve done their own due diligence and satisfied themselves that the project is viable and likely to make a profit.
- Does the site matter to you? It may be that you want to see new homes built there as an asset to the area and to stimulate the local economy and provide jobs. Investing in housebuilding is an easy way to make a positive social impact.
- Is this the first deal you’ve looked at, or have you run the rule over a number? If this is the only deal you’ve really examined, then if not purely for comparison purposes, it can be useful to explore what other opportunities are available.
As with any investment, you don’t have to be hurried into making investment choices and it’s worth taking your time over the process. Some investments are better than others and some are better suited to your circumstances and investment strategy than others.
With lots to take into account - and professional advice always being recommended to take - if you ask yourself these questions, you’ll be going a long way to making sure you've made the right choice for you.