Property crowdfunding is where a large number of people each contribute a small amount of money to purchase a property.
With property ownership remaining elusive for a large percentage of the population, especially the younger generation, an increasing number of would-be homeowners are now turning to crowdfunding property in order to get a foot on the property ladder.
But what exactly is property crowdfunding, and how does it work?
What is crowdfunding?
Crowdfunding is a concept that has exploded in recent years. It is a way of raising substantial amounts of money, by asking a large number of people to each contribute a small amount. It has traditionally been used to raise finance for business projects and ventures, but is now migrating across to the property market.
How did crowdfunding start?
The first recorded case of crowd investing happened in 1997, when British rock band Marillion funded their reunion tour with online donations from their fans.
Inspired by the potential of such funding projects, a number of crowdfunding platforms began to spring up, raising funds for a wide variety of different projects, across a broad spectrum of genres and industries.
By the late noughties, crowdfunding had become a popular way to not only raise finance, but also raise the profile of a project or product.
Crowdfunding projects are set up in such a way that makes them easily shareable via social media.
Between 2009 and 2011, money raised from crowdfunding activities grew from $530 million to $1.5 billion, and The World Bank predicts investment through crowdfunding platforms will reach a staggering $96 billion globally by 2025.
Crowdfunding as a market research tool
In addition to its primary role as a way to finance a project or product, crowdfunding has the bonus of providing an invaluable market research opportunity.
Crowdfunding project authors can assess demand for their product or service and respond to audience feedback before making decisions about investment priorities.
Rewarding early investors with previews or samples can also be a fantastic way to gain honest and insightful reviews. In this way, start-up companies can present a number of ideas and then refine their final offering based on audience appetite.
Crowdfunding for property
Product and project crowdfunding has become fairly mainstream, but now there’s a new kind of crowdfunding that is quickly gaining in popularity.
Using the basic principles of other crowdfunding models, crowdfunding property is a way for members of the public to invest in the property market, without having to find the cash to buy a whole property.
It also gives them the opportunity to choose between investing in one property and splitting their investment across a number of different properties.
What are the benefits of investing in property using crowdfunding?
There are many benefits to investing in the property market via property crowdfunding. The benefit that is probably most often spoken of is the ability to get a foot on the property ladder without having to fund large deposits.
It has been well publicised that an increasing number of people are struggling to buy their own property, thanks to tough mortgage lending criteria, large deposit requirements and high rental costs making saving for a deposit challenging.
Property crowdfunding allows you to benefit financially from property by investing from as little as £1,000.
Property crowdfunding is also an appealing prospect for those who are looking for a better return on their money than the rates currently on offer from more traditional banking products, but who do not want the day-to-day hassle or maintenance costs associated with being a buy-to-let landlord.
How to invest in property via crowd source funding UK
After viewing a range of online profiles, you will be able to choose which property, or properties, you would like to invest in. Once the crowdfunding target has been met, the property will be purchased under the umbrella of a limited company. The number of shares you own in that company will be determined by the level of investment you have made.
Properties will be externally managed, so you won’t have the hassle of any day-to-day maintenance or management issues.
When you invest in each property, the terms of the investment will be outlined. The return arrangement may be predetermined, or you may get to select between a share of the rental income, a share in any increase in property value, or a combination of the two. After a pre-determined number of years, the property will be sold and you will have the opportunity to withdraw your money or reinvest it.
Is property crowdfunding the future of property investment?
According to a report published in 2015, Goldman Sachs suggested that crowdfunding is “potentially the most disruptive of all the new models of finance”.
The scope and potential for anyone to invest, whether you have £100 or £1million, has made crowdfunding a truly revolutionary concept.
There are now many property crowdfunding platforms, and many of them have been very vocal in saying they believes the days of traditional buy-to-let investment are over.
Over the last few years, government legislation has increased red tape and costs to landlords, making traditional property investment more challenging.
Property crowdfunding offers you the opportunity to invest in property, share rental income and any profits from capital growth from as little as £1,000. By making the entry point much lower than it would be to become a landlord, this allows investors to spread their money across a diverse property portfolio.
Investing in property via property crowdfunding means there are no costly void period and none of the hassle that comes with being a landlord.
According to The House Crowd, one of the UK’s better known property crowdfunding platforms, the property crowdfunding projects they run usually take around just five days to raise the required amount of capital.
Investors with The House Crowd can choose between a six per cent annual return on their investment and a share in half of the profit when the property is sold, or a seven and a half per cent return, with no share of the equity when the property is sold.
So, what sort of person invests in property via property crowdfunding?
The House Crowd says their customers include those who would struggle to raise enough capital to buy a property on their own, ex-landlords who are disheartened by increasing red tape and the hassle of property maintenance, and those looking to beat the low interest rates currently on offer from traditional savings and investment products available at the bank.
Why would someone wanting to buy a property for investment purposes choose property crowdfunding over more-traditional borrowing?
Buy-to-let mortgages and other commercial property lending has become increasingly difficult, time consuming and expensive to source in recent years.
The sort of peer-to-peer lending available via crowdfunding platforms gives a greater level of speed and flexibility, and allows more adventurous projects to go ahead that may struggle to get funding from more traditional financial institutions.
The House Crowd say that over the past two years they have seen a major shift in investor demand towards peer to peer lending – whereby investors lend directly to property owners and property developers looking for short term finance.
These products pay typical interest rates of 8-10% p.a. with a relatively short-term commitment of 6-18 months (subject to loan repayment or the sale of development properties). Peer to peer lending projects are hugely popular with investors as they offer a fixed interest rate, with money secured on the borrower’s property via a legal charge, and a clearly defined exit strategy.
How to invest from home
If you are looking for a property investment website, there are a number of property crowdfunding platforms currently operating in the UK. If you type ‘property investment UK’ into a search engine you’ll likely be inundated with companies.
Some of the largest and best-known platforms include:
- The House Crowd
- Property Moose UK
- Property Partners
Is there a downside?
As with any investment, property or otherwise, investing in the property market via a crowdfunding platform does not come without risks.
The property market has the potential to go down, as well as up, and that must be considered before making any investment.
There are always risks involved with the property market and investment of any kind, and your return is not guaranteed should the project fail. For this reason, it is important that you seek independent financial advice about the diversity of your investment portfolio.
If you are looking to gain property investors via a crowdfunding platform for a property you wish to purchase, there is no guarantee that you will attract enough investors to make the project a reality.
Whilst little data is available on the percentage of property crowdfunding projects that get the go ahead, Kickstarter – one of the better known general crowdfunding platforms – quotes just a 44 percent funding success rate.
This means more than half of the projects running at any time will not raise sufficient capital to go ahead. That being said, property crowdfunding is a concept that is enjoying a huge amount of growth in popularity, and its market only looks set to grow as more people explore new ways to invest in property.