Crowd-funding property investments: open to anyone with a spare £10
Tuesday, 27th September 2016
Successive political, cultural and financial developments over recent years have led to the emergence of a generation of people for whom property ownership is a distant dream.
For some, property ownership is not appealing in itself. For others, the chance of saving a meaningful deposit is so remote that the prospect isn't even entertained. Even successful Landlords with vast and profitable property portfolios are losing interest in the sector, as taxation and regulatory disincentives dampen the mood (is the age of the amateur landlord over).
The good news is that a novel and accessible way of investing in property is being ushered into the mainstream. The popular crowd-funding method of financing start-up companies is spreading into the world of real estate, with various exciting new entrants appearing such as:
- Piggyback Property (invites investments of 1,000 or more with estimated potential total returns of up to 30%);
- Property Moose (invites investments in increments of as little as 10); and
- Property Partner (invites investments of 50 or more with estimated rental returns of 10% per year after fees).
The hurdles of traditional real estate investment
Traditionally, real estate investment has required:
1. Lots of cash;
2. Potentially expensive legal due diligence prior to purchasing the Property;
3. Satisfaction of institutional lenders' requirements;
4. Ongoing management of the property, e.g. letting agents, repair and maintenance etc.;
5. Sale of the property (with potentially expensive legal fees) to realise your investment.
If you follow the traditional format, you will have invested a great deal of your own (and, usually, an institutional lender's) cash in one building/house/office block/warehouse - meaning that your eggs are all in one basket - so to speak. The ongoing maintenance and management of the building would be your sole responsibility, as would the risk of void periods and loss of rental income.
The crowd-funded real estate model
With a crowd-funded model, the benefits and burdens of investment risk are shared by hundreds, or even thousands, of individual investors.
An investor can diversify their portfolio, so they could, in theory, invest 10 in a terraced house in Leeds, 20 in an apartment block in Bristol and 30 in a retail outlet in London.
All the due diligence and purchase costs would be funded through the "crowd," (so shared between you all) as would the ongoing cost of maintenance, letting and management of the building. These costs would be fractional (per investor) compared to the costs of investing on your own or in a traditional joint venture.
Getting your money back
Each potential investment project has a different intended life-cycle or "investment term" of, for example, 3 years, 5 years or longer. At the end of the term, the property is sold and the proceeds distributed among the investors.
If you want to exit the investment earlier than that, some of the schemes offer to help you to find buyers for your individual shares, meaning that you could exit whenever you like, but only if you can find a willing buyer.
A new breed of "Crowd Landlords"
As crowd-funding gains popularity in the real estate sector, we can expect to see a rise in the number of "Crowd Landlords" i.e. specially incorporated companies through which the property is purchased and the shares of which are owned by the multiple investors for that particular project.
Ideally, the rise in the number of Crowd Landlords should lead to an associated rise in the quality of landlords generally. The incidence of rogue, unscrupulous landlords would be minimised, as the multiple investors comprising the "Crowd Landlord" (with the assistance of their crowd-funding platform) would value longer term, almost institutional, investment principles such as:
1. The investment being as safe as possible;
2. The property and common parts being professionally maintained and managed to a high standard;
3. The Crowd Landlord being fully compliant with relevant laws and regulations (and so not at risk of prosecution);
4. The property being high in demand and let at appropriate rents (so it is more likely to be occupied and generating rental income.)
The crowd-funding platforms themselves are also keen to attract and impress their investors by demonstrating their dedication to professionalism and good neighbourliness. Piggyback Property, for example, is keen to assert that they value not only ensuring good returns for their investors, but, importantly, that they benefit the wider community in which they operate.
The relative safety of bricks and mortar
Whilst there is the ever-present risk of making capital losses in any investment, one of the enduring appeals of real estate investment is that it is rare for the residual value of the asset to ever reduce to absolute zero. This is unlike the risks associated with investments in start-up companies, a large proportion of which will inevitably fail, evaporating your capital investment to nothing.
Now that many of the traditional hurdles to real estate investment are being broken down by this new wave of crowd funding opportunity, we should expect to see a significant rise in the popularity of crowd-investments of this kind.
For larger developments or projects, we are likely to see investments funded partly through institutional lenders (who will be keen to preserve a decent "loan to value ratio") and partly through the "crowd".
Is crowd investment for you? A health warning
Whilst you ponder whether to start building up your crowd-funded property empire, remember always that investments of these kind are "capital at risk" - meaning that all of your money could be lost and/or access to it delayed pending the sale of the property. Ensure that you seek and take heed of appropriate advice, and invest only in the full knowledge that, whilst you may make decent returns on your investment, you may also make losses and may, in a worst case scenario, lose all that you invest.
If you are interested in the legal aspects of crowd-funding, either from the perspective of a potential investor, or if you are a developer/purchaser looking for investment, do get in touch any time...