If you’ve got cash to invest but no time or inclination to become a full-time property investor or developer, one way to enjoy the rewards of property investing can be to leverage someone else’s time and experience
There are multiple ways you could do this, but one is through a Property Crowdfunding or Peer to Peer Lending platform.
There are around 40 property crowdfunding platforms in the UK today, each one offering different takes on property crowdfunding investments, but which ones are the best?
What are the differences between Crowdfunding and Peer to Peer platforms?
The term crowd funding is a “catch all” term, but there are a few differences you should be aware of.
Property Crowdfunding is where you own equity (shares) in a property or property development project.
Peer to peer lending is where you provide a loan to a property developer for a fixed return on your money.
So which one is better? Let’s take a closer look at both…
How Equity Property Crowdfunding Works
Typically, a crowdfunding platform will source property opportunities and offer investors a percentage of the equity to make the deal happen.
A company known as a special purpose vehicle is set up to buy the property under and each investor is distributed shares in this company proportional to their investment.
How do you make returns?
If the intention is to rent the property, income is normally paid as monthly dividends after deducting expenses like maintenance, management, taxes and so forth.
Sounds straightforward, but what if you want to sell?
Unlike a direct investment, the exit is controlled by the platform, with each investment having a specific strategy.
What types of strategies are there?
You may come across platforms with buy-to-sell, buy-to-let, or a mixture of both.
On a buy-to-sell investment, upon a successful sale, the profits after taxes are distributed to all the shareholders.
With buy to let investments, the property is a much longer-term investment so you may need to wait several years before the property sells.
How long? This will depend on the terms and conditions of the platform you use.
However, some crowdfunding platforms offer a secondary market, where you can try to sell your shares to other investors.
This means if there are buyers available, you may be able sell your shares earlier. Although this is not guaranteed.
What about the risks in equity property crowdfunding?
Most crowdfunding platforms will undertake due diligence to minimise risks on the projects they bring into the platform.
This can be attractive for an inexperienced investor, but it’s important to remember investing in property in any capacity is never black and white.
The value of property prices and rents can go up and down. Therefore, your rental returns, capital gains or original investment are not guaranteed.
How Development Loan Crowdfunding Works
A development loan means you are taking on the role of a mortgage lender and pledging your funds towards a property development project.
The loan is usually for a fixed time with a fixed return on your money.
The interest you earn is usually paid as a lump sum and returned with your original investment at the end of the loan term.
For example, if you were to loan £100,0000 at 10% interest over 12 months. The payment due at the end of 12 months would be £110,000.
Today, the opportunities to loan funds on property crowd funding platforms can vary from short-term bridging to mezzanine and senior loans.
Each of these options offer different amounts of risk and reward, so it’s very important to do your due diligence before you invest in any development loan.
In most cases, development loans are secured, which means investors will hold a first or second charge on the title deed of the land or property.
This can be an attractive security position to an investor.
Theoretically if things didn’t go to plan, the property could be sold to try and recover the investment, unlike equity investors who are always last in line to get paid.
Development loans can be more lucrative investments than returns from buy to let, but there are more risks involved.
What kind of risks?
With any kind of property development there could be delays during planning, construction, or the sales period which can affect the duration and returns to investors.
Some projects may even make no profit, or a loss — so again, it’s really important to complete your due diligence beforehand.
As a result of the additional risk factors, those who want to invest in property development loans are required to self-certify as Sophisticated or High Net Worth Investors.
The current criteria to qualify as a High Net Worth investor is either by having a minimum annual income of £100,000 or at least £250,000 in NET assets, which does not include your home, pension or insurance.
Alternatively, if you’ve invested in more than one unlisted company in the last two years (perhaps through a crowdfunding platform) or you are a director of a company with annual turnover of £1,000,000 then you may qualify as a sophisticated investor.
What are the advantages of property crowdfunding investments?
One of the obvious advantages to property crowdfunding investments are the smaller financial commitments and ability to spread your risk across multiple projects.
It also means you get access to a variety of property classes and development projects that otherwise would require a lot of experience and large capital outlay.
Also, as the investments are fully managed you can avoid the potential pitfalls of direct ownership, like tenants and maintenance.
Certain platforms even give you the option to invest using an ISA, so there are potential tax saving benefits for UK investors.
What are the disadvantages of property crowdfunding investments?
Unlike a direct investment, the strategy, management, exit, and investment terms are fixed by the platform, so you won’t get a choice in the sale or day to day operation.
In equity based investments, extra fees and the fact that many properties will not be using leverage may also reduce the overall returns.
Ultimately, If you’re someone who likes to have more involvement or control in your investments, crowdfunding might feel a bit disconnected investing alongside hundreds of other random people.
Are there any alternatives to crowdfunded property investments?
REITs (real estate investment trusts) are another way you can make passive investments into property.
These companies trade on the stock exchange and purchase residential or commercial property using the money pooled from investors.
Although REITs won’t typically produce returns as high as a direct investment, in the UK they must share at least 90% of their taxable income with shareholders so the dividends can still be quite attractive.
One of the benefits of trading on a stock exchange is that your shares can be sold almost anytime, unlike a property that could take weeks or months to find a buyer.
However, this also means REITs can be more susceptible to stock market fluctuations, and the efficient pricing of the market can make it harder to find “below market value” opportunities like in the property market.
What about direct passive investments?
For sophisticated and high net worth investors that have larger amounts of capital to invest, it can be possible to invest in a property bond or joint venture with a property developer directly.
Unlike property crowdfunding investments, working directly with a developer could offer more flexibility and better investment terms.
For example, you may want to keep the investment passive, but still be able to visit the site and see development progress taking place in person.
If you’re a UK company director, you might even be able to make these type of property investments more tax efficiently by investing in property using a SSAS pension.
However, this is a more advanced investment technique and won’t be suitable for everyone. You should be comfortable doing your own due diligence or paying for professional advisors to check everything over first.
How can you partner with a property developer directly?
One way to find potential developers to work with directly can be at local property networking and business events.
This can be a good opportunity to meet and get to know more about a developer and find out whether you may both benefit from working together. Many developers utilise investors as part of their overall strategy, so are often happy to discuss potential collaborations.