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Friday, April 1, 2016

Is the property crowdfunding explosion safe?


By Jonathan Stevens

Can property crowdfunding be trusted?


Crowdfunding has been the darling of the media for some time now. From movies to videogames and smart watches to smart cars, everything, it seems, has caught the crowdfunding bug, and property is no exception.

However, while investing $50 in an obscure documentary that you would like to see made may be a risk worth taking, does the same apply to what is obviously a far bigger investment? Buying property is not simply a ‘set and forget’ affair. It requires a degree of expertise and knowledge to make dreams of a buy-to-let future become a reality. Can one really trust a company that has sprung up from out of nowhere to handle your property portfolio for you?

How does property crowdfunding work?


There are several different models available on the market at present, and the fluid state of the technology realm will undoubtedly bring up some new players with new ideas in the not too distant future, too. However, the key movers and shakers in property crowdfunding are working on one angle – giving those who couldn’t otherwise have the opportunity to invest in the property market the chance to do so.

They aim themselves at individuals by preselecting a number of different properties and then asking their would-be investors to put their money into buying said properties. This sum can be as little as $50 or as much as $50,000 depending on the company and the property in question.

Generally, there is a fee attached to the investment, somewhere in the region of 2 percent is the norm, and this will cover the company’s costs associated with buying the property for all of the investors. Once the property is secured it is placed on to the rental market, and the company then takes a further percentage of the monthly income gathered from rent – usually around 10.5 percent.

Too many players entering the market


With so many crowdfunding property companies hitting the market – the UK Crowdfunding Association recently said that 14 of its last 40 members were property crowd-funders – there is growing concern over the viability of such a crowded market place.

Larger players are expected to enter the arena soon, so what will happen to the smaller companies and those who have already invested in property with them? Will their investments be safe should a takeover come to pass? Or will the terms and conditions that they signed up to suddenly change and leave them high and dry without a worthwhile return on what was once a seemingly good thing?

The truth is that no one knows for certain how this is going to play out, so caution should be the watchword of the day. Despite the positive press in other areas, many of which are more lifestyle driven, crowdfunding is still a very new and untested way to invest in something as diverse and ever changing as the property market.

While some companies involved in the practice of crowdfunding properties will undoubtedly survive and thrive moving forward, many won’t. The question is, are you willing to gamble such large sums of money on what may well turn out to be a loser in a very competitive race?

About the authorJonathan Stephens is the founder of Surrenden Property Investment and has a wealth of experience in the property sector and shares his knowledge by writing for property and investment magazines.

Image: Author owned and licensed