Crowdfunding is most definitely a thing of the modern day and has become a popular way to quickly fund investments which are normally considered high-risk.
A new type of crowdfunding has come about recently through sites such as Property Partner, Property Moose and The House Crowd. These sites allow anyone to invest any sum of money towards the purchase of a buy-to-let property alongside other investors. In some examples, London properties sold by these sites have reached full funding within thirty minutes – no need for mortgages, large deposits or insurance.
In return for their investment, they are offered a rental return and a split of the property profits when the property is sold. Alternatively, investors can sell on their share of the property to the secondary market at a price suitable to them, before the end of their fixed term.
All of this sounds very tempting – a peer-to-peer finance option merged with the opportunity of buy-to-let and access to the housing market without any of the usual hassle?
What are the risks of this property crowdfunding?
One problem with crowdfunding a property is the lack of control for investors. The ability to control rental prices, tenants, property management or even how the costs of the property are calculated.
Alongside this, there has to be a high level of trust in the platform controlling the property. Scamming is a potential risk as more of these platforms crop up, as well as trusting your platform of choice to return your money in the event of them folding.
Another risk for unwary investors is that most of these crowdfunding platforms reserve the right to borrow against any of their properties, should the income not cover the cost of running and upkeep. Unfortunately this often happens in buy-to-let and in a crowdfunded property, you may have to sit and watch silently as your investment falls instead of rises.
Buying a property always costs money no matter how you fund the investment. These costs have to get factored into the return on investment, alongside the finders fee, income percentage share and capital gains cut the crowdfunding platforms will take.
Flexibility and liquidity also pose a problem – if you want to sell the property and regain your investment you have to rely on the agreement of all other investors and the terms set by the platform (usually 5 years). You can sell your shares on the secondary market – providing there is one there to sell to!
This new form of property crowdfunding is very tempting and can be a way in for people outpriced of certain areas or keen to get on the property ladder. There are many reputable crowdfunding platforms to invest in but it doesn’t seem to offer the no-risk alternative it’s thought to be.
A safer alternative if you are not able to invest in a full property cost is to opt for a property development option where you can invest in a company with extensive knowledge of the property market. These firms are able to buy properties well below market value, develop properties in up-and-coming areas and offer a much safer and rewarding return on investment. Contact Mirox to find out more.