Investing in Property with Crowdfunding
I was reading a press release yesterday from property crowdfunding company The House Crowd and it mentioned that they had recently hit the £2 million investment mark. With that in mind I thought it might be worth taking a few moments here to explain – to those who don’t already know – just what crowdfunding is and also what the potential benefits of crowdfunding are for the small investor, specifically in the property sector. To keep things balanced we’ll also mention the potential downsides too so that you can make an informed decision.
What is crowdfunding and why do investors use it?
Crowdfunding quite simply allows smaller investors to ‘crowd’ or ‘pool’ their money together enabling them to invest in larger assets. There are a couple of reasons why investors might want to do this. The first and most obvious reason would be that they simply don’t have the funds available to invest in larger asset classes on their own, leaving these investments out of reach. Crowding together with other smaller investors can therefore open the door to investing in more expensive assets, like property for example. Even if an investor did have the money to fund a property purchase outright, there are still many reasons why they may choose to go down the crowdfunding route.
Spreading Risk – An investor might well want to get involved in the property sector but may not want to place all of his eggs in one basket so to speak. Crowdfunding would allow the investor to decide exactly how much cash he or she is willing to invest and still reap the rewards of any growth in property prices or rental income.
Less Hassle – Let’s be honest here, being a landlord isn’t for everyone. The constant worry of costly repairs, whether the tenant will pay the rent, or if the property will be left unoccupied is just too much to take for some. Crowdfunding allows investors to get involved in property investment without all of the hassle that goes along with it.
Less Commitment – Another benefit that I can see from using crowdfunding to invest in property is the short length of time you are required to invest should you decide that the investment isn’t right for you or isn’t providing the expected return. The House Crowd for example allow you to invest from just £1000 – not a pittance I know but it’s still a lot less than buying a property outright – and the minimum term for you to hold your share of the investment is just 12 or 18 months depending on whether you go for the income + capital investment model or the Income only model. Again this takes away some of the huge commitment that direct property investment can bring.
Annual Returns – One of the primary reasons that crowdfunding for property investment is proving so popular at the minute is the potential fixed annual return compared to the extremely low rates currently available on savings accounts and ISA’s. The House Crowd for instance, claim to deliver a fixed dividend of 6% or 7.5% per annum, again depending on the investment model chosen. This is quite attractive in the current climate where many savings accounts and fixed rate bonds are paying less than 2%.
So there we’ve mentioned just 4 or 5 of the positive aspects that might make crowdfunding an attractive investment to quite a few investors. So what might the potential drawbacks be?
Fees – As with any managed investment you will not receive 100% of the profit. Be it through a profit split or through management fees, there will be some kind of fee to pay to the company responsible for managing the crowdfund. These fees will differ depending on who you invest with, so it’s important to read the fine print and ensure that you are happy with the details. I suppose the question for every investor would be whether the advantages of hassle free property investment and the fixed annual returns on offer make it worth giving up a portion of the potential profit?
The Unknown – When you place your money into a savings account, you have a level of confidence in what to expect. As crowdfunding is still a relatively young phenomenon, for many it is also a venture into the unknown. As mentioned in the earlier referenced press release however, there doesn’t seem to be any shortage of takers for crowdfund investment. As long as savings rates remain so low, we can expect savers and smaller investors to continue to look for alternative investment options, even if they do go a little out of the comfort zone.
What do you think? Could crowdfunding for property investment tempt you?