In these days of poor returns on savings and an unreliable stock market – it is many people’s ambition to supplement their savings or their future retirement by investing in property. The catch is that often large deposits are required along with taking on another mortgage – there are also the other potential headaches of bad tenants (if you decide to rent out for a regular income) and the cost of renovation, repairs and maintainance. So, in essence, you need a large deposit, a good credit history, steady employment and possibly a lot of patience to jump up to the next rung of the property ladder. Obviously, you need to be a relatively rich and chilled out investor to take this route.
Crowd-funding (or Crowd-sourcing) has been around for a few years now; this is basically where a collective of diverse people pool their resources (usually small amounts) to fund and invest in a particular project such as book publishing, music production or setting up a business – and now property investment…
How does it work
Collectively buying property as an investment is not a new concept, but is now becoming more structured and accessible via new companies in the marketplace such as the Housecrowd and Crowd2Let, who basically act as a portal for potential investors to pool their funds. The crowd sourcing companies do a lot of the ‘donkey’ work such as finding suitably low-priced properties, renovating them to raise their value, finding tenants and maintaining the properties.
Investments in a property tend to be for a set period of time (it varies from company to company but usually falls within the range of 2-5 years). There are a variety of investment models, these tend to be either an income model, where the property invested pays a fixed annual return, or a profit model were the investor get a share of the profits when the property is sold (or it could be a combination of both these models).
Depending on which company you were to invest with, the smallest investment at the time of writing is between £500 and £1000 – which of course puts it within reach of investors that want to get on the property ladder but do not have the funds to do it in the traditional way.
This type of investing does seems to be gaining traction, so I wouldn't be surprised to see more companies popping up over the next few months or even some of the already established crowd-funding companies getting in on the act.
What About the Properties?
The property crowd-funding companies that have set-up over the last couple of years have generally been formed out of traditional property investment companies and estate agencies, so they should know what they are looking for. In essence they will search for undervalued properties, seeking out repossessions through liquidators, also from buyers who are looking to sell quickly. By obtaining properties at below the market value they hope to maximise the yields on sale or rental.
What are the Downsides
The main downside is that properties (like stocks and shares) can go down as well as up in value depending on the market conditions – you need to know what would happen in this situation – as just like shares in the stock market you could get back less than you put in.
Another issue is that the company you invest with could go bust – again you need to be absolutely certain that you investment is secure – should this happen. Under current UK legislation your money is not protected under the Financial Services Compensation Scheme should the company go under. Due diligence is called for and you should discuss your plans with a professional adviser such as your solicitor or financial adviser in advance of signing any paperwork.
Disclaimer: This article is for information purposes only. I am not offering investment advice, nor am I advocating the companies mentioned in the article.