This article is a guest post by Property Moose
Unless you’re sitting on a lump sum of cash, breaking into the property market might feel impossible. It’s easy to understand why. When house prices in England rose by 146.3% between 2002 and 2016, average nominal earnings only rose by 46%. In the UK, average house prices were £206,665 in Q1 2017 and the average first-time buyer mortgage requires a 17% deposit. It seems the market is out of reach and the gap between entry and exclusivity is steadily widening.
For many, the housing market might look like a closed door. Perhaps that’s why the property crowdfunding space has gained such momentum in recent years. By offering the opportunity of “fractional” homeownership, investors can buy a slice of a house (from just £10) and receive proportionate income. The sector is offering individuals the chance to break into the property market without the burden of debt and without having to scrape together a lump sum of cash.
So, what are the ins and outs of the industry? Is it risky? Is it regulated? Who is it for? We decided to myth-bust 8 misconceptions about property crowdfunding.
Funnily enough, the concept of crowdfunding has been around for centuries. Mozart and Shakespeare often relied on a community of investors who offered financial aid in return for manuscripts or acknowledgements. The Statue of Liberty was in fact America’s first crowdfunding project without intending to be, with newspaper pleas published in attempt to fund the statue’s assembly.
However, property crowdfunding itself has been around for a few years now. Though the industry is still nascent, it seems to be gaining more and more momentum. During its UK beginnings, equity crowdfunding was the fastest growing form of alternative finance between 2012-2014, increasing by 410%.
Perhaps the opposite is true. One of the founding factors of property crowdfunding is providing an affordable way into the property market. Though minimum investments vary from platform to platform, you can invest in property with as little as £10 on platforms like Property Moose. You could say that the sector is driven by social change and opportunity, so low, affordable entry points are common.
Again, not entirely true. Property crowdfunding is open to retail, sophisticated and high-net-worth investors. Whether you’re a young professional trying to climb the property ladder, a parent saving for their child’s future or a millionaire looking to diversify an existing portfolio, property crowdfunding could have something to offer you. However, if you’re totally new to the world of investing, it is always worth doing some research into how the property market works. Conducting your own due diligence is vital.
False! Regulation is key. It is worth making sure the property crowdfunding platform you choose is regulated by the FCA (Financial Conduct Authority), as regulations are in place for good reason. They provide the necessary guidelines which help to ensure that the highest levels of consumer protection can be offered.
No investment is risk-free. With property investment, property prices can go up as well as down. Often, the potential risks will be listed on each platform and across the majority (if not all) financial promotions.
The level of risk involved may vary from platform to platform. Some platforms only make money when you do, which means they will only list an opportunity which they believe will work. Some platforms have in-house property experts who spend their time analysing the market and sourcing potential deals, with the aim to offer opportunities with strong potential. It’s worth doing some research into a platform’s property sourcing process. How do they identify a good investment? How do they compile their projected returns?
Not true! This might be one of the most exciting things about property crowdfunding – the chance to call yourself a landlord without having to change a light bulb. One of the biggest drawbacks of being a traditional buy-to-let landlord is the associated headache. Think tenancy sourcing, maintenance, repairs and being on call 24/7 without getting paid for overtime. Some property crowdfunding platforms aim to provide a more “hands-free” property investment experience. By taking care of all the headache, investors can potentially enjoy the benefits of passive property investment.
While it’s hard to say that this is untrue for all property crowdfunding platforms, some firms offer a unique structure which ‘ring-fences’ your investment. With Property Moose’s chosen nominee structure, for example, properties are purchased through an individual special purpose vehicle (SPV) in the form of a limited company. Investors will then buy shares in the SPV which holds the property. As you’re not actually investing in Property Moose, your initial investment won’t be affected in the unlikely circumstance that something happens to us.
Unfortunately, property is an illiquid asset. Liquidity is measured by how quickly you can trade your investment in for cash without compromising its value. If you wanted to cash in your house, it could take weeks, and you may have to incentivise a buyer by lowering the price. However, at Property Moose, we’ve wanted to provide a potential solution to property’s lack of liquidity. Last year, we launched our exclusive secondary marketplace, which allows you to buy and sell shares on our platform in real time.
Property crowdfunding is certainly an exciting sector, and while the industry is only a few years old, it holds an incredible amount of potential.
Want to learn more about property crowdfunding?
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).