The 6 most commonly asked questions about property crowdfunding
£3.2 billion. That’s how much the UK’s alternative finance market is worth according to NESTA’s 2015 UK industry report. That’s almost double the 2014 estimates of £1.74 billion. Seems like a lot, right? I bet you’re wishing you had started investing with crowdfunding platforms a while ago. Let’s put it in a different perspective. According to financial services provider Fiserv, this financial sector will be worth as much as £12.3 billion by 2020. Alternative finance is only growing.
The most surprising finding of the study? Real estate is the single most popular sector: the combined debt and equity-based funding for real estate amounted to almost £700 million in 2015. Not as surprising if we consider the fact that between 1997 and 2016, UK property prices have grown by 11.65% per year on average according to a well-known property crowdfunding platform. But how does this impact you?
Both peer-to-peer (debt) and equity-based property crowdfunding has become increasingly popular over the last few years. Both involve raising money from a crowd of individuals. However, it is important to make a distinction between them. Peer-to-peer crowdfunding involves borrowing directly from a crowd of individuals, cutting out the bank in the process. With peer-to-peer lending you will not be entitled to any share of the profits but you will be paid a fix amount of interest until your loan is repaid.
Equity-based crowdfunding lets you have a share of the property. A crowd of individuals pool together their resources to fund the development of an estate, while the costs and profits are shared proportionately. Think of it as becoming a landlord, only without the hassle of having to manage the real estate. The best part? You don’t need to have exponentially deep pockets to start investing in real estate!
The last few years have seen the rise of a number of property crowdfunding platforms. Some cater to a select clientele with a minimum £5k investment, others start as low as £10. Anyone looking to invest their hard-earned cash would be foolish to overlook these opportunities. So let’s address the risks of property crowdfunding - so you can make the best financial decisions.
How does it work?
You choose the property crowdfunding platform you prefer and find a property you wish to invest in. Each investment is structured in an individual limited company (SPV). Upon investing, you will become a shareholder of the company, or a lender to the company.
You will receive a share of any return, whether it's income, capital growth, or interest in relation to your investment. You can exit early on the secondary market, provided there is a willing buyer, or wait for the term to expire.
Now that you understand how it works, let’s answer a few questions that crowdfunding experts are regularly asked by people looking to invest in property:
1. This industry is awfully young. Are there any regulations in place so that I know my money is safe?
Property crowdfunding, although new, is a very regulated industry. Regulations implemented by the Financial Conduct Authority (FCA) mean that investors and potential investors are never presented with unsubstantiated performance claims.
2. How do I know I can trust a certain property crowdfunding platform?
Professional crowdfunding companies will always conduct themselves according to a strict code of conduct laid out by the FCA. But do your due diligence and research the platform. Most will have a FAQ or a highlighted section to address your worries. Some even have testimonials from other investors. You can also contact them directly via email or social media with any questions you might have. Any company that respects its clients will try to address your issues in a timely manner.
3. How do I know the project is real and the development is not a scam?
Property crowdfunding platforms take on the responsibility to check all projects on their platforms. Most charge their investors an initial 5% fee for their research but this means that you can rest assured the project you plan to invest in has already been thoroughly vetted.
That being said, the choice of investment is yours, unless you hire a financial advisor to help build your portfolio. Crowdfunding platforms will not advise on any property. Please keep in mind – all investments involve risks and the value of your investment can go down as well as up.
4. What fees and taxes should I expect if I do invest?
Most property crowdfunding platforms have three types of fees:
A buyer’s/finder’s fee, around 5%.
An ongoing management fee, anywhere between 5% to 15%.
A sales fee, anything from zero to 25%.
Tax on dividend income over £5,000.
Capital gains tax on shares sold via secondary markets.
Stamp Duty Reserve tax (a 0.5% tax on the cost of purchasing shares on secondary markets).
5. How are my funds secured in the project?
In the case of equity investments, once the property is purchased, you have a legal share in the SPV that owns the property and your rights are protected by the company’s articles.
6. What happens if the project goes wrong?
If the property does not get fully funded, the investment will be returned to the investors in full or, depending on your choice, it can be moved to an alternative investment.
Property has always held a higher risk of investment but the yield also fits the risk. Crowdfunding just made it easier to access it without needing to have a billionaire’s deep pockets. The opportunities are out there and as any good financial advisor would tell you – diversify your investment portfolio. Now it’s as easy as the click of a button!