Property crowdfunding: an alternative to equity?

For a crowdfunding investment with a potentially lower risk, property crowdfunding may be worth investigating. As interest in equity crowdfunding continues to rise, it was only a matter of time before the craze spread into the property market; arguably, the most popular area to invest.

There are several platforms online that offer property crowdfunding opportunities, including PropertyMoose, The House Crowd and Property Partner. Essentially, this service allows you to invest in a buy-to-let property without having to take on the additional responsibilities that come with being a landlord. It is popular among investors who want a slice of the property market but lack the capital to create their own portfolio; the Council of Mortgage Lenders show that the value of buy-to-let lending currently stands at £27.4bn.

Andrew Gardiner, chief executive of Property Moose, says “Crowdfunding opens up the market to everyone, so they can invest in property for a much-reduced commitment … Plus, it allows people to diversify across asset types and geographic areas, helping to spread risk and, hopefully, increase returns.”

So what are the benefits?

Compared to equity crowdfunding, where only 10% of the businesses are likely to succeed, putting money into the property market is a comparatively low risk investment. With both house prices and rent continuing to increase, especially in London,
Crowdfunding a property gives you access to a market that would otherwise be out of reach.
With crowdfunding, the properties have no mortgage; this means no exposure to interest rate fluctuation. You also have a legal charge on the property, increasing the safety of the investment should someone along the line go bankrupt.

Equally, for tenants, living in a crowdfunded property could mean more security – if one person wants to sell, there is no change of ownership none of the hassle for the tenant associated with a normal sale. Similarly, as ownership is unlikely to change and the house will always be for renting, there is more certainty as to the rental period.

And the problems…

There is no way to get your money back fast. Investments are for a fixed term, usually 5 years, and if the house needs to be sold, the process usually takes a minimum of three month. If you wish to just sell your share, what you receive for it depends largely on whether there is a secondary market interested in buying it.

Secondly, the fees on this sort of investment are high. The House Crowd will charge 5percent up front nd a profit share for thie manafagement company from the rent, and gains of “around 25 percent”. Property Moose charges you 5 percent up front as a finders’ fee, and then 15 percent of the yeield as well as 15 percent of any final capital gain. These charges all add up – there is the danger of an investment in this way not being value for money.

Whilst one of the advantages of property crowdfunding is easier access to the market, Royal Institution of Chartered Surveyors has expressed concern that such easy access to property investment could exacerbate volatility in the market.

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