7 Key Factors To Consider When Choosing A Property Crowdfunding Platform

Property Crowdfunding has caught the public’s imagination and since the first platform, www.thehousecrowd.com, started in 2102, numerous platforms have been set up and you now have a wide variety of platforms to choose from.

 
Here’s a quick guide to the things you should consider when choosing a platform:

1. Returns

The first factor is the most obvious: What are the returns on offer? The returns you will receive are based on how well the property performs, so a useful guide is to see where the properties are based and how well rental yields perform in that area. Then ask yourself: “Do the yields being offered by the platform beat the averages for that area?” If not, and you think you could do better yourself, then the question arises as to whether it is worthwhile working with that platform.

Check how far the promised returns are free from other fees, and make sure you are clear on the actual return on investment after all other costs have been deducted.

2. Yield v Capital Growth

People invest for different reasons and many are happy to only achieve a low yield as they are confident in the prospects for capital growth.

However, profits from capital growth are speculative and if you want to minimise your risk, you should invest in those properties which produce a healthy cash flow. If the property is putting money in your pocket every year, then you will not be under pressure to sell and can wait for the optimum time to liquidate and benefit from the capital appreciation.

The biggest risk associated with investing in cash flow positive properties is damage and/or non-payment of rent. This does need to be factored in as it will happen at some point and yields will be affected.

One major benefit of crowdfunding is that if you diversify and have money spread over ten properties, the losses caused by one bad tenant are easier to bear than if you had all your money in that one property. You can also spread your investment over speculative capital growth properties and income producing properties.

3. Security and Risk

 The target demographic for most property crowdfunding companies tends to be people who are unhappy with conventional savings accounts and disgruntled landlords. And this target group tends to be risk averse. Ask: how will your investment be protected? If it goes wrong, how much equity is there to enable you to recover your money?

• Buy to let with no mortgage = lower risk/ decent return.
• Purchase with a mortgage = higher risk / potentially higher returns
• Development finance = higher risk/potentially much higher and shorter term returns

It’s all very well a platform offering a high return, for example, on a development finance deal, but what happens if the developer goes bust. You must check what security there is in place to help recover your capital if it all goes wrong?

Unless there is sufficient equity in the property you may be at risk of losing some or all of your money. Standard buy-to-lets are generally more secure as the property already exists and there are fewer things that can go badly wrong. But, in a longer term buy-to-let investment, you should make sure you are protected either by ownership of the property via your shareholding in an SPV or a charge registered at the land registry.

What happens if your dividend is not paid?  This could be a risk if there are 3^rd party landlords/ developers involved where they simply do not pay the dividends that are due. If that happens, how are you protected? For example, is there a default mechanism in the SPV’s articles allowing shareholders to force a sale if the returns due are not paid.

4. Is the investment being offered by a company associated with the platform itself or an unrelated third party?

The fourth key factor is to ask yourself: do the platforms provide their own properties and third party offerings, or just their own properties? If it is an investment being offered by an SPV associated with the platform itself then it should tell you that the platform is taking responsibility for the investments, it promotes and delivering the returns.

Be wary of platforms who may focus on raising funds for anyone who wants to list their investment on the site (and earn money from doing so). Platforms with integrity, which care about long term reputation, will conduct serious due diligence on the investment and the people behind it before allowing them to promote any property on their platform. So if the investment is being offered by an unconnected third party (e.g. a private landlord or property developer), then you should ask what due diligence has been conducted on that third party, consider what their track record is and look at what additional safeguards are in place.

5. Track record of success and transparency

The next essential is finding out: Who are the people running the platform? After all, it will be their judgement about the right investment properties to buy. Look for people who have a proven track record in property investment. Look for people who are experienced investors themselves with a portfolio of their own properties.

As property crowdfunding becomes increasingly popular, there will undoubtedly be platforms run by inexperienced people just looking to jump on what they perceive as a lucrative bandwagon.

As anyone who has bought their own buy-to-let knows: managing property, even through agents, is troublesome and things go wrong. You need to be confident that the people protecting your investment have the knowledge and ability to make the right decisions.

Check how long the crowdfunding company has been trading. Can they show a history of successful investments and a track record of paying out dividends on time? With regard to transparency, do they make you aware of the potential pitfalls as well as the benefits to the investment?

6. Exit

The sixth factor to consider is how easy is it for you get your investment back when you want to?

One drawback of property crowdfunding is that as an investor you will have little control over when the property is sold. If you think you might need your money back at short notice, it is probably not the right investment for you.

With most platforms you will be making an investment in shares which improves liquidity to some degree but it still may take a while to sell those shares and there is no guarantee you will be able to do so.

Shorter term projects are available (e.g. 6-12 months) with defined exits are available – usually structured as loans with charges registered as security. So if that is of interest then look for sites like www.thehousecrowd.com that offer them.

Check the small print to see if the companies will assist you in finding a buyer for your shares.  It’s unlikely there will be any guarantees to do so but you can find out how likely it is.

7. Customer service

The final essential in finding the right property crowdfunding platform for you is that hardy perennial: customer service.  There is nothing more frustrating than working with a company who do not look after you once they have taken your money.

There is no way to know this definitively, but see how quickly they respond to enquiries and deal with complaints.

• Are they easy to contact?
• Are they helpful and informative in dealing with you or come across as pushy sales people?
• Are there testimonials and case studies on their website? Search online for reviews and find out how others have found their service.

 

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Written by Frazer Fearnhead, The House Crowd

Frazer started his career as a lawyer in the music industry. He has been investing in property since 1994 and working with other investors since 2003, helping them invest in over £60,000,000 worth of investment property along the way. He is the founding director of The House Crowd – www.thehousecrowd.com – the world’s first property crowdfunding platform.