Property Crowdsourcing and Crowdfunding is Risky
In the future there will be many tears from investors in some crowd funding schemes that invest in residential property predicts David Lawrenson of property consultancy, LettingFocus.com
Property Crowdsourcing and Crowdfunding is Risky
Many folks who cannot get into buy to let due to lack of funds for a deposit or who don’t fancy learning what really they have to do to make a success of being a landlord are often attracted by crowdsourcing, sometimes called Crowdfunding.
Crowdfunding takes the combined power of peer-to-peer financing, mixes it up with buy to let and is supposed to allow anyone with modest means access to the housing market and the joys of being a landlord, without ever needing to worry about finding tenants, voids or fixing a boiler that’s just conked out.
This will sound appealing to many – and the better and bigger crowdfunders are bubbling along very nicely.
But we think this collective approach has significant risks. And we advise extreme caution.
Let’s have a look at the dangers.
First off there is the issue of control. Basically, you won’t have much. And crucially no control at all really over the key things that make an investment in residential property stack up – like who the tenants are, how the property is managed or how costs are worked out.
You may also have limited or no control over what type of property is bought or in which area. And even if you do, you will have no say over the actual properties that are bought or how much is paid for them.
Second, most crowdfunders keep for themselves the right to borrow against the property, should the money that comes in not be enough to cover costs. If that happens you will see the value of your own share fall rather than increase. And you won’t be able to do a thing about it, at least until, or if, you are allowed to vote on it.
Third, whoever is the manager will need to be paid. These guys aren’t doing it for love. Most funds charge a five per cent up front fee and a profit share of around 25 per cent. Others we have seen want 15 per cent of the gross or net rents plus 15 per sent of any capital gain. Ouch!
Fourth, getting your money out is not going to be easy. If you own a directly held property, you can always sell it as long as the price is right. You retain control. But with a crowdfunded house you cannot do that. You can only sell when you are allowed to, which will be set out in the prospectus, but even the timing of that can usually be altered if circumstances permit.
And even when you can sell, what price will a punter pay? The fact is that there will some discount tied up in the house until the whole group sells. And if prices are falling when you come to sell, that discount will be higher still.
In effect it is like buying and holding shares in an investment trust. All investment trusts trade at a discount to net asset values of the underlying assets that they hold, simply because of the nature of the fact that no one person owns the whole trust. But, with investment trusts, as a punter, you can at least buy a trust at a discount to its net asset value anyway. It won’t be so easy to do that with property.
Crowdfunding and Property
Crowdfunding looks easy. It seems like an easy win. And it certainly has its place for those who like a hand off investment. A big merit of Crowdfunding has to be not having to deal with mortgage lenders, most of whom have silly criteria which exclude lots of decent investors.
But we think Crowdfunding will result in some tears for some before bedtime in a few years.
The alternative is to be a hands on landlord.
The fact is that being a hands on landlord is not hard. When one invests in property to let, one is not finding a cure for malaria or sending a rocket to mars. It is really not impossibly hard and you don’t have to do that much. If you wish, you can outsource the tenant-find to a letting agent (though you’ll still need to set criteria and check anyone before they are allowed into your property).
And when the boiler breaks, it’s not that hard these days to find someone competent to come and fix it.
Just read our book (under £10 on Amazon for the new edition – see links below) and for more tailored one to one advice, come to a one-to-one half day consulting session with me.
Our one-to-one sessions do not cost much either – and you will have more than enough knowledge to make a success of buying and letting property. (PS: No one should ever consider going on any property mentoring course where they want to charge you more than £1,000. You simply don’t need to spend that much. And we don’t charge that much either)
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David Lawrenson, founder of LettingFocus also writes for property portals, speaks at property events and is regularly quoted by the media.
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The crowdfunding industry is now fully regulated by the Financial Conduct Authority, so providers have to build and maintain viable businesses, with the watchdog checking up on their processes. This also means that these types of platforms have to make sure investors understand the risks of a project and conduct thorough due diligence on borrowers. Some lend-to-save firms have ways to safeguard your money, but unlike with a savings account you will not get the deposit protection of the Financial Services Compensation Scheme.