Property crowdfunding has emerged rapidly in recent years as a means of increasing wealth and diversifying investor portfolios.
Although a relatively new area of property investing, its growth is accelerating, with more and more people taking advantage of its many potential benefits.
Involving multiple - often hundreds - of investors buying shares in a house or property development generally via a crowdfunding website, the platforms that facilitate these investments enable investors to invest alongside other likeminded individuals in a way that wasn't previously possible.
With returns coming via the property’s increasing value, which is usually realised when the development is sold (or sometimes via rental earnings), investors can spread their interests across a broad range of opportunities, enabling them to quickly and easily build up a balanced portfolio of investments.
The growth of property crowdfunding
In the UK, the explosion of property crowdfunding is partly attributed to changes to the buy-to-let scheme. Two years ago, the government announced a new 3% stamp duty on buy-to-lets.
What’s more, the ability of landlords to offset mortgage interest payments on buy-to-lets against their rental income to reduce tax is currently being phased out. This form of tax relief was marked down to 75% last year and now stands at 50%. By 2020 this incentive for landlords will be gone entirely.
Against these changes, investors have flocked to property crowdfunding sites. Growth has also been fuelled by the willingness of new and existing property sector firms to embrace crowdfunding and the advancement of financial technology.
Another factor in property crowdfunding’s growth has been its appeal to people previously excluded from property investment. The barrier to entry – once tens of thousands of pounds at the very least – is now considerably less and this had made it accessible to more people than ever before.
Tough access to property investment for people with a limited budget has been exacerbated by soaring property values. While values in London’s overheated property market have long been on an upward trajectory, recent data suggests rising prices across the country in coming years.
A study published in November by upmarket estate agency Savills predicts that prices will increase strongly in northern England, the Midlands, Wales and Scotland over the next five years. It forecasts a 21.6% growth in average house prices in the North West by 2023. Prices across the UK, meanwhile, will increase by 14.8% on average, it says.
This trend is likely to make entry to the property ladder via the mortgage route harder, something that only enhances the appeal of property crowdfunding on projects across the country.
Choosing the right property crowdfunding opportunities
As a property crowdfunding investor, you have the opportunity to target strong returns on your investment, just as a traditional property investor might. Crucially though, you will face none of the responsibilities that come with life as a landlord.
What’s more, whilst the multitude of platforms and opportunities and can seem overwhelming at first, getting involved is actually relatively easy compared to various other types of investments. For the most part, the processes are quick, easy and efficient.
But it has to be remembered that you are making a financial investment and your capital is at risk. As such, you need to fully research the opportunities to ensure you invest in those right for your portfolio needs.
And whilst every investor should take their own steps to deciding on which opportunities to invest in, there are certain criteria to look out for as a newcomer.
For example, does the investment threshold suit your budget? As a beginner, you may be looking to dip your toe in the market with a small initial outlay, and there are opportunities that allow for investments at most levels to be made.
Similarly, the frequency at which returns are delivered may also influence your decision. Capital growth is usually realised at the end of a fixed investment term – often with the sale of the development. If pinned to rental income, your investment may result in returns being delivered monthly or quarterly. Sometimes, depending on the opportunity, both are possible in the one investment, and so it’s important to understand what your portfolio requirements are.
It’s also vital to understand the approaches taken so you can have full confidence in them.
For instance, it’s common practice in the UK to create a Special Purpose Vehicle (SPV) – a separate entity that effectively owns the property or development. Both commercial and residential properties can be invested in this way, and members of the crowd invest in the SPV for it to be created to finance the construction and sale of a property or development.
In these instances, it is important to research the development company's exit strategy for such developments. Is there a clear plan towards a sale? Is the team strong enough to deliver to it? Are the market conditions suitable to achieve the proposed exist?
And in a similar vein, what is your risk appetite for investing? Property, like all investment asset classes, carries some degree of uncertainty. The route to exit may not follow pre-laid plans exactly. You must seek assurances from your research that the plans are realistic and likely to be realised within the proposed timeframe.
External factors will, of course, have some influence on whether that happens. Demand among tenants and purchasers for particular types of properties and the locations of them may fluctuate. As such, many investors look to invest in properties and developments in areas that they know well, as they can have greater confidence of whether they are in high demand and have a bright future as a place to live and work.
Exploring the property crowdfunding sites
Given the rise in popularity of crowdfunding in general in recent years, the growth of crowdfunding sites has been considerable. As such, there are platforms to suit most investor requirements and the level of knowledge you have about property crowdfunding and the property sector in general may shape your choice of platform. While some sites are targeted at sophisticated investors, others are designed to be easily accessible to the absolute beginner.
They will feature lots of introductory steps and information, educating users as they go. If you are looking for a crash course in property crowdfunding it may be advisable to choose a site like this, perhaps progressing to more complex platforms - and ultimately investment opportunities - if needed once your understanding and confidence grows.
But whichever platform you choose, many will argue that it's important you have as much confidence in them as you do the opportunity. You ideally want to be working with a platform and their investment team that's fully researched the opportunity; that's working with them to deliver an opportunity to their investors that's fully researched.
As mentioned, it's an investment so your money is at risk, but if you have an experienced team carrying out their due diligence, couple that with your own independent due diligence and that can go along way to helping to ensure you're making the right investment choice for you.
Getting started with property crowdfunding
Due the huge variety of opportunities and platforms, and as a result, the low entry points, many find the best way to start their property crowdfunding journey is to begin with a small investment and expand as their confidence, knowledge and portfolio size grows.
By working with small investments at a time, you immediately begin mitigating the risks involved. Reducing the risks completely isn’t possible, but as any successful investor will attest to, one of the most important considerations is increasing the likelihood of seeing a return on your investment by reducing the level of risk associated with it.
And with it arguably easier than most other property investment routes to mitigate risk - through diversification, for instance - it’s little surprise that more people than ever are taking to property crowdfunding today.