Is property crowdfunding the right vehicle for you?
Continuing from founding director and CEO of The House Crowd, Frazer Fearnhead’s previous post explaining what property crowdfunding is, this article will deal with the question of whether it is something you should consider using.
If you happen to be an experienced well off property investor and can obtain bank funding relatively easily to build your own portfolio – and are willing to devote time and energy to doing so - then investing via a property crowdfunding platform is probably not right for you as you will be able to invest as an individual and keep all the profit (after paying off any interest).
On the other hand, if you are a part-time or novice investor who does not have ready access to funding for deposits or the ability to get further mortgages, then it could well be worth considering, especially if your money is currently festering in a bank account earning next to no interest.
Property crowdfunding has enabled pretty much anyone who wants to invest in property to get involved whilst making it as easy, simple and safe as possible. But, as with anything there are both advantages and disadvantages.
Some believe that investing via a crowdfunding company which sources, purchases and manages the property is a way of mitigating your risk as an investor as it enables you to spread your capital over different types of property in different areas. Crowdfunding allows you to leverage the expertise and knowledge of experienced property professionals to deliver a financial return without any of the hard work usually required.
Therefore, property crowdfunding is often attractive to people who don’t have the time or experience to invest in property themselves but who are attracted to the property sector as a means of providing for their financial future.
Crowdfunding is also an option for those who have some funds to invest but perhaps not enough to invest by themselves in a property. That, in essence, is one of the chief draws of a crowdfunding platform: it enables like-minded individuals to join forces for common benefit. Rightly or wrongly many people feel less exposed when investing alongside others. However, the counter argument is that just because many people are participating in something, it doesn’t automatically mitigate all the risks – most of which are exactly the same as when you invest in property yourself.
Others do not like the fact that investing via a crowdfunding platform means you lose a large part of your control over the property you have invested in and you will be dependent on decisions made by others or on other shareholders voting the way you would like. But that is the same position whenever you invest in a company run by other people.
You are able to choose which properties you invest in but must accept that you will have very little influence over its management and trust that function to 3rd party professionals.
If you want more certainty over your return and exit, you can always opt for a secured loan which are usually for periods of up to 12 months and pay a fixed interest rate, with your investment secured against the property in the same way a bank secures your mortgage.
So for lots of people that hands free crowdfunding service is attractive but for others that lack of control will deter them. A lot depends on the individual, what they want to achieve and what level of risk they feel comfortable with.