Crowdfunding has grown in popularity in the property market over the last decade. An import, originally from the U.S.A, there are now a number of successful crowdfunding portals in the UK. Some focus only on residential and commercial development opportunities and multi-lets, while others allow investors to put money into several (or even just one) Buy to Let opportunities. It’s also possible to fund bridging loans via a Crowdfunding platform.
How crowdfunding works
Like standard investing in developments and buy to let, the money lender receives ongoing returns in the form of a percentage profit depending on how much he or she has invested in the property. This can take the form of both rental income and equity growth.
The investment is hands-off but the investor will be given regular updates of how the development is progressing or the rental opportunity panning out.
Pros of property crowdfunding
- There’s an ethical bent to ‘pooling’ cash to invest in developments from construction to sale, which otherwise wouldn’t have been built because of a shortage of cash;
- Unlike with a Joint Venture, there are no complicated tax implications or personality clashes (since you’re investing at home via an online portal);
- Returns on a large-scale development will be much higher than for a standard buy to let;
- It’s easier to diversify i.e. you can invest smaller amounts in several projects, rather than a lot in one buy to let. This ultimately makes your investing less risky in the sense that if one investment fails, you’ll still have income from the other two.
Cons of property crowdfunding
- Just like in conventional property investing, online crowdfunding sites can’t guarantee success; there will always be a risk and you could lose your money;
- All platforms charge an initial fee for joining (around 5%) and if it’s a buy to let opportunity then there’ll also be a management fee. You may also have a capital gains fee on exit;
- Although you’ve invested in a property or development you won’t have any physical access to it meaning you’ll have no say over its management;
- If your investment turns out to be a dud, it won’t be easy to sell your share on and you may be stuck with it.
Peer2Peer Lending is a version of Crowdfunding where investors ‘lend’ money for developments. Again, the property investment is ‘hands off’ in that you’re simply putting up the money. The actual day-to-day interest in the property is taken care of by those running the fund.
Pros of Peer2Peer Lending
- There are no upfront fees to use the platforms;
- There’s more stability than with stocks and shares;
- The loans are secured on property, reducing risk for the investor;
- Similar to Crowdfunding, you’re investing alongside experienced, expert investors which in itself should bring a sense of security if you’re a newbie;
- Another similarity with Crowdfunding is that all deals are pre-vetted, meaning all the hard work has already been done.
Cons of Peer2Peer Lending
- Your capital can still be at risk;
- Profits will always be reliant on how the property market is doing at any one time.