Crowdfunding is a new way to invest in buy to let property from as little as £500.
Several online platforms manage crowdfunding for property investors – but the concept is new and potential investors should consider the risks as well as the gains.
The concept is simple. A group of investors pool their cash, typically in amounts from £500 to £10,000.
The crowdfunder sets up a company for the investors and buys a property for refurbishment and letting.
The investor receives a share of the rent, generally as a dividend, pro rata their number of shares in the company.
At some stage in the future, the investment is cashed in by selling the property.
Many crowdfunding investors spread their risk among several properties rather than piling all their cash into one home like a traditional buy to let investor.
As with any investment, managing the risk is the key to making profits.
- Rental risk tops the list. The property needs to be in a condition to let for a commercial rent. Empty properties do not make money, so choosing the right home to let is crucial. The crowdfunder also has no control over the rent charged for the home, the costs of neither refurbishment nor ongoing maintenance.
- Price risk is another consideration. Property prices rise and fall and ‘average’ home prices or asking prices on online portals are not always the value a surveyor puts on a home. Buying at the right price and cashing out at the right price are important factors in realising an investment.
- Control risk – If you have equities or own buy to let property, you are in control of the cash and can choose when to buy and sell. As part of a pool crowdfunding, you either need another investor to step in and take over your share of the property or the agreement of your fellow investors to cash out together.
- Fees and charges risk – Different crowdfunding sites operate under similar but not identical business models. Some charge fees, others do not
Despite the risks of crowdfunding, many small business start-ups have successfully raised cash by pitching to investors and gone on to emerge as successful enterprises.
Providing crowdfunding property investors carry out their due diligence, there’s no reason why pooling investment cash cannot provide decent returns.
However, investing in business start-ups through a Seed Enterprise Investment Scheme (SEIS) tax wrapper provides the missing elements to property crowdfunding – generous income tax and capital gains tax breaks on investment.
If the deal goes wrong, SEIS also offers significant loss relief to lessen the risk and cash to offset against other income.