How crowdfunding has democratised property investment
Until a few years ago, it has only been accessible as an asset class by those who have fairly substantial amounts of capital. What’s more is that it’s far from a hands free investment and can take considerable time and effort to manage – especially as your portfolio grows. Frazer Fearnhead looks at how crowdfunding has democratised property investment.
As with anything new, when you start to invest in property, there is a good chance you will make lots of mistakes, and making mistakes when you are buying assets costing hundreds of thousands of pounds can be very costly, especially if you have bought just a couple of properties and one turns out to be a lemon.
Property crowdfunding enables pretty much anyone, not just those with oodles of cash, to get involved with investing. You can invest with much smaller amounts of capital than has traditionally been required – often from just a £1000 or less. You can spread your available funds over a number of different properties and benefit from both rental income and capital growth but without the hassles usually associated with investing by yourself.
It has truly democratised property investment
Crowdfunding, and especially property crowdfunding, has soared in popularity since its inception just a few years ago and is forecast to grow 100 times in size over the next five years.
There are a wide variety of different property crowdfunding companies to choose from – some are debt based (peer to peer loans) and some are equity (where you invest in shares in SPVs). Each platform has a slightly different business model or geographical focus. You can choose from short term secured loans, development finance, and long term buy to let, some with assured rental income.
As with most great ideas, it is inherently simple
Property investing is recognised as one of the most successful ways to invest for good returns, so why not let people who want to invest pool their resources to purchase property and share in the returns from development rents or sales.The process is straightforward. To invest with any crowdfunding site you must first self-certify as one of 3 types of investor before you can access investment information. This is a legal requirement.
Once registered, you can view full details of the property investments the company has to offer including all financial information. If you are dealing with a regulated site – as you should be - they are under a legal obligation (and are monitored by compliance personnel) to ensure all the information they provide you with is accurate and presents a balanced picture of the risks as well as the rewards.
You simply select those properties you want to invest in, complete an online form saying how much you want to invest, then transfer the requisite amount normally either to a solicitor or other regulated client account.
As far as equity investments are concerned you will usually be investing in shares of an SPV (a special purchase vehicle) set up simply to buy that property. In such way, your investment is ring-fenced and should the crowdfunding platform itself run into financial problems the value of your investment should not be affected.
Is It Regulated?
The concept of crowdfunding was not strictly legal in many countries until a few years ago. In the UK it was classed as a ‘collective investment scheme’ and many prohibitive restrictions applied as to how it could be marketed and managed. However, due to the surge in the popularity of crowdfunding around the world regulators have relaxed the regulations, although they are still concerned about the risks involved to the public. In 2014, the Financial Conduct Authority (FCA) introduced new regulations and controls that simultaneously recognised that the public wanted to invest in crowdfunding whilst ensuring the risks were made clear and protecting crowdfunding investors from misleading information and rogue operators.
All firms which are regulated by the FCA will have details of their authorisation number and permissions on their website.
If you can’t find these details, then you should not invest with that company. There are an ever growing number of regulated property crowdfunding companies. The longest established platform is The House Crowd which started trading in early 2012 and was followed by others such as Property Moose and Crowd Property in 2013, and Property Partner and Crowdlords in 2014.