Crowdfunding has exploded in popularity in recent years as technology has made it easier than ever to work together for a common goal. From funding innovative new products on Kickstarter to helping your friends reach their fundraising targets on JustGiving, crowdfunding allows anyone to contribute to a project much bigger than themselves.
But crowdfunding is not limited to Kickstarter-style projects or charity pages. There’s many other applications, particularly in the financial and investing arena.
One of the most interesting recent innovations I’ve come across is The House Crowd, which combines the power of crowdfunding with something dear to many British investor’s hearts: property.
UK Investors have long found comfort and investment returns through owning bricks and mortar. For many, investing inproperty is attractive because it is much less abstract than owning stocks and shares –you can often-times see what you are investing in. However the price of most properties are far beyond the reach of many beginner investors, many of whom have seen house prices rise in recent years, but have not been able to benefit from the growth as it can take years to save up a sufficient deposit to make a purchase.
But property crowdfunding is changing this.
Investors don’t need thousands of pounds to benefit from property price growth. Instead, a group of investors each contribute smaller amounts into a collective investment in property.
To be frank, until very recently my experience with investing has been limited to unit trusts which invest in the companies in the major stock-market of the world. But I have a friend, David, who is actively investing in crowdfunding property with The House Crowd and it’s made me take a closer look at this new type of investment.
*David has agreed to share some of his experiences in a later blog post.
Update: That post is now live here
There are 3 different types of investment available on The House Crowd platform
Buy to Let Investments
Investors who wish to add some buy to let investments into their portfolio without the hassle of dealing with renters and maintenance, can buy shares in a limited company that owns a buy-to-let property. This company is created specifically for this purpose and is called a SPV which stands for Special Purpose Vehicle. The shares then entitle you to receive a share of profits from both the rent and the eventual sale of the property. This type of investment is much less flexible than a publicly traded company or unit trust so before you invest you must appreciate the minimum term is typically two years.
The second type of investment is in a new build or re-development projects. Typically the investment is for between 6 and 18 months and the funding is used to finance the development. This type of project appeals to investors because there is a clear time-line for the exit and return of capital. The House Crowd pays investors a fixed return typically of 10% p.a. Depending on how the particular investment is structured, this comes in the form of interest if the investment is structured as a loan to the development project, or as a preference share which pays a premium upon redemption of the shares, which allows investors to take advantage of their capital gains tax allowance.
The final type of investment is a secured loan secured by charge over a property. The return depends on the loan to value ratio of the property in question and is paid with the return of capital upon the redemption of the loan, typically 6-12 months.
How The House Crowd digs Out Investment Opportunities
One of the main appeals is the crowdfunding platform allows you to share in the potential growth of property in the UK. And it’s reassuring to know that all the properties featured on the site are vetted by experts with over 20 years of property investment experience. I don’t know about you, but it’s unlikely I would be able to seek out good investment property deals myself.
When I’m investing in unit trusts, I can search ‘fund supermarkets’ with different criteria such as geographic location, expense ratio and performance. There are always lots of potential places for your money so having a good selection to choose from is important. Thankfully for property investing, The House Crowd is always adding new property projects to the platform that you can then look into a bit further. You can select a property project that’s close to home, or you might find one with more attractive growth prospects somewhere else that you might not have otherwise come across.
Of course, the vetting process that projects go through to be featured on the site and made accessible to investors is reassuring but it’s important to know that you can’t simply rely on it 100%. As with all investing, there is always a degree of risk and you should conduct your own due diligence so you can make the decision to invest in a project. Would-be investors should also understand the time horizon involved. Depending on the project, you may not be able to get your money out of a project for a number of months.
Crowdfunding allows investors to get involved in projects that they might otherwise not be able to afford on their own. Together with other investors, profitable projects can become funded much quicker and easier, from a wider range of backers than ever before. For more information visit The House Crowd.
This is part 1 of a series of posts about crowdfunding with The House Crowd. In the next post I will share my experiences of signing up and the range of investment projects on the platform.