Property crowdfunding promises to solve two big disadvantage of normal buy-to-let investment: you need a lot of money to buy even a single property, and it can take a fair bit of your time to buy and manage it.
But does it deliver? And how does it work? By the end of this article, you’ll have a good understanding of what property crowdfunding is all about – and whether it might be suitable for you.
What is property crowdfunding?
Property crowdfunding is when a group of people get together to buy a single property asset, so they each own a small share.
If you got together with a few friends to buy 25% of a property each, you could call that crowdfunding. Usually though, in property, crowdfunding refers to when an online platform brings a large number of investors together and manages the whole investment process for them.
What’s the minimum investment in property crowdfunding?
A huge benefit of property crowdfunding is you can invest in property with far less money than you’d need to buy a buy-to-let property on your own.
It depends on the platform, but the minimum investment can be as little as £100 and is normally less than £1,000. That’s worlds away from buy-to-let, where you realistically need at least £20,000 to buy even at the lowest end of the market.
What’s the difference between property crowdfunding and peer-to-peer lending?
They’re often lumped together, but there’s an important distinction to make between property crowdfunding and peer-to-peer lending.
Property crowdfunding is a form of equity crowdfunding: it’s just like owning a property yourself, except you only have a small share of it.
By contrast, peer-to-peer lending puts you in the position of being the mortgage company: you lend money so someone else can buy or develop a property. They then pay you back by selling the property or refinancing it with a mainstream lender.
(To use the proper terminology, with peer-to-peer lending you own the debt, and with property crowdfunding you own the equity.)
So peer-to-peer lending is a short-term loan, that just happens to often be secured against property: you don’t own the property in any way.
Property crowdfunding is (usually) a long-term investment, where you do own the property – just a piece of it.
Are you crowdfunding property development or buy-to-let properties?
The most common form of property crowdfunding is just like buy-to-let: a property is bought and rented out, and that rental income is split between all the different owners.
But there’s also property development crowdfunding, where you buy a share of a development project like building a new scheme of houses or converting an old warehouse into a block of flats. When the project is finished and sold, the profit is split between all the different owners.
These couldn’t be more different.
The buy-to-let model is a long-term investment that aims to produce a stable income stream with some additional capital growth over time.
The development model is a short-term investment (usually less than two years) where all the profit is made in one go, when the property is finished and sold. The returns can be higher, but they’re a lot more unpredictable: developments are risky, and the projected profits can be much lower than planned (or there can be no profit at all).
It’s critically important to be crystal clear which type of property crowdfunding you’re investing in.
Development crowdfunding, regular property crowdfunding and peer-to-peer couldn’t be more different in terms of risk profile, timeframe and potential upside. They all involve property as the underlying asset, but that’s about the only similarity.
Confusingly, the majority of property crowdfunding platforms mix at least two of these types – sometimes all three. Sometimes they’re in separate sections of the site, but sometimes they’re all mixed together in the same list. When looking at one of these sites, make sure you’re clear on exactly what you’re interested in and make sure that’s what you’re looking at!
For the rest of this article, I’m going to be talking about “buy-to-let style” crowdfunding – because I believe that’s what most people have in mind when they hear the term “property crowdfunding”.
How does property investment crowdfunding work?
Each property crowdfunding platform in the UK has a slightly different angle and structure, but the basic model is usually the same.
- The crowdfunding platform identifies a suitable property – whether it’s a single house, a selection of flats in a block, or an entire block.
- Investors say how much they want to put in, until the purchase is 100% funded.
- The platform forms a dedicated company (Special Purpose Vehicle, or SPV) to buy the property.
- Investors are given shares in the company proportional to the amount they contributed.
- The platform finds a tenant, collects the rent, and manages everything that needs to be done.
- The rental income (minus the expenses) is paid out to investors, proportional to the amount they invested, in the form of a dividend.
Before investing you should read the process of the specific platform you’re interested in detail, but it will normally be a close variation of this model.
So: when it comes down to it, you actually own shares in a company that owns a property, not the property itself.
Does this matter? Not really: it’s just a simple and practical way of managing hundreds of different owners. It does make a difference to how you report your income and pay tax on it, but that’s beyond the scope of this article.
What happens once you’ve invested in a crowdfunded property?
Well, if the tenant reports that the hot water isn’t working, you and your fellow owners draw straws to decide who has to go around and fix it.
Not really!
The beauty of property crowdfunding is that it’s 100% hands-off. The crowdfunding platform takes care of everything: or more accurately, they employ a managing agent who takes care of everything.
Now, nobody is doing any of this out of the kindness of their hearts The managing agent will get paid a fee, and the crowdfunding platform might also take a fee to compensate them for managing the managing agent. I’m not complaining about this at all: if you don’t want to put your own time into something, you’re going to end up paying for it. But it does take a bite out of your returns…
Property crowdfunding returns: What can you expect?
Nobody knows how a crowdfunding investment will perform. That’s the nature of equity investments: the platform will give their best guess about what the outcome will be, but it’s impossible to predict the future with total accuracy.
Just like any type of property investment, returns from property crowdfunding come in two forms:
- Monthly profit from rental income minus costs. (This might be paid out quarterly or annually rather than monthly, depending on the platform.)
- A capital gain (hopefully) when the property is sold.
However, you could also make a loss (on paper) in a particular year, or even overall. Equity investments, including property, are inherently uncertain: you shouldn’t invest if you want a steady, predictable income stream.
Can you invest in property crowdfunding within an ISA?
It depends whether the specific platform you want to invest with has made its investments ISA-eligible or not, but many have. They would fall within the new(ish) Innovative Finance ISA.
Be aware though that you can only open an Innovative Finance ISA with one platform in any given year, so it’s not ideal if you want to spread your funds between multiple sites.
How can you exit your investment?
One of the drawbacks of normal property investment is that property is highly illiquid: if you decide you want to sell a property, it can take months even in an active market with plenty of buyers. It also involves all manner of stress, dealings with estate agents and visits to solicitors.
Is property crowdfunding any easier to exit?
Well, yes – in that you don’t have to do any of the running around. A few clicks, and your work is done.
But that doesn’t mean you can sell instantly at any time.
The process differs between different crowdfunding sites. For example, Property Partner gives you the option to exit five years after the initial purchase was made. If you want to sell, you’ll have the option of getting out one way or another – but if you want to continue holding, the property might be sold anyway depending on what other investors want to do.
If you want to exit earlier than five years, Property Partner has a “secondary market” where you can offer your share to other investors. You can set your own price, so if you’re in a real rush to sell you can offer a discount to make it more likely that someone will buy.
It’s important to note that in both of these scenarios, your exit will never be instant: it could take weeks or months for you to find a buyer for your shares, or for the property to be sold.
That’s not an issue with property crowdfunding per se: the underlying asset takes time to sell, and that’s just how it is. At least someone else does the work for you, and you can go through the whole process without talking to someone with overly gelled hair and a shiny suit.
What are the risks of property crowdfunding?
The risks of property crowdfunding are broadly the same as investing in property on your own:
- The value of the property might fall
- The property might sit empty, not producing rental income
- There might be lots of repairs that increase the expenses
That’s not a complete list by any means, but those are the most obvious risks people tend to think of. With property crowdfunding, you’re adding an extra risk: platform risk.
By “platform risk”, I mean that you’re totally reliant on the crowdfunding platform to manage the investment. If they fail to find a tenant, or spend too much on maintenance, or in any other way mis-manage the property, there’s nothing you can do about it: you’re just a minority shareholder.
I also mean the risk that the platform will cease to exist. Crowdfunding has had a bit of a boom, and I suspect (but don’t know) that many of the platforms are loss-making. What happens to your investment if the platform you’ve invested through goes kaput?
In theory, you’ll remain a shareholder in the SPV that owns the property, and someone else can step in and take over the running of the company. But how smooth will that process be in practice? It hasn’t happened yet, so we don’t know.
How concerned should you be about these risks? That’s for you to decide. Crowdfunding is new enough that no platform has an extensive track record, but I’d stick to one of the biggest players and feel relatively confident. Then again, I’m hands-off by nature and used to trusting other people to manage the properties I own directly: if you prefer to do everything yourself, you might find it too much of a leap.
Property crowdfunding pros and cons
Compared to owning buy-to-let property directly the “normal” way, what are the advantages and disadvantages of property crowdfunding?
Pros:
- You can get exposure to property with much, much less investment
- Because of this, you can diversify your investment across far more properties and avoid having all your eggs in one basket
- The buying process takes up much less of your time
- You don’t have to worry about tenants, repairs, rent collection, compliance, council tax, licenses…
- You can still invest even if you can’t easily qualify for a mortgage
- Depending on the platform, you can potentially sell your investment more easily and more quickly
Cons:
- Your returns will likely be lower than owning directly, because there are more fees involved and you’re not using leverage
- You can’t “kick the bricks” and be totally sure of what you’re buying
- You don’t have any control over the management of the property
- You usually don’t have total control over whether the property gets kept or sold
- You might be locked in for a set period of time (even though directly owned property is hard to sell quickly, you could theoretically reduce the price to a point where it’d sell tomorrow if you really had to)
- No crowdfunding platform has a long enough track record to really know what the results will be
The best UK property crowdfunding sites
Here's the rub with this whole thing: there aren't currently any crowdfunding sites that I'd consider investable.
The original and biggest crowdfunding site is Property Partner, which has had a tough couple of years. As far as I can tell, their platform wasn't growing fast enough to give them a realistic chance of becoming profitable, so they introduced some extremely unpopular new fees for investors to help balance the books.
I get the impression that it's worked and the ship has been steadied (which is great, because platform collapse is the absolute worst outcome for investors), but the new fees along with underwhelming property performance mean that the returns don't (in my opinion) justify the risk. They've had plenty of bad luck along the way (including getting properties caught up in the ongoing cladding drama) so I'm not blaming individuals, but still – I don't consider it a compelling investment option at the moment.
Other platforms have come and gone, including one called British Pearl which inexplicably chose to sell its entire portfolio at a knock-down price in the middle of a property boom. But at the moment, there's nothing I'd be tempted to invest in.
It's a shame, because I completely believe in the model – but no-one has made it work yet.
Who is property crowdfunding right and wrong for?
Property crowdfunding is ideal for someone who understands the appeal of property as an asset class, but lacks either the funds or the time to buy individual buy-to-let properties.
It’s for someone extremely hands-off, who’s willing to view their property investments in the same way as an investment in a stock market fund: no emotional attachment, no need to meddle. Forget you even own it for large chunks of time, let someone else do all the work, and take the dividends at the end of each quarter.
If you have (say) £100,000 in total to invest and you want property to make up 10% of your portfolio, then crowdfunding could be an answer. With £10,000 you’re a long way from being able to buy even one buy-to-let property, and if you only want 10% in your portfolio then chances are it’s not something you’re interested in enough to put much time into.
On the other hand, it’s completely wrong for someone who has both the funds and the desire to own properties directly. If you’d enjoy adding value to properties or negotiating hard to get a bargain, you should absolutely do that. Even if you’ve got the funds and the desire but not a lot of time, you can still own the properties directly but get a lot of the work done for you by working with sourcing companies and managing agents.
Like anything, property crowdfunding isn’t “good” or “bad”: it totally depends on your personal situation, your goals, and your feelings towards property in general.