Property crowdfunding is a huge risk for buy to let investors, consumer watchdogs have warned.
Crowdfunding is when a pool of investors join together to fund a buy to let or house in multiple occupation.
Typically, they buy shares in a company that owns the property then share the costs and profits while giving a slice of their earnings to the crowdfunders who manage the project.
Just a few days after the Financial Conduct Authority (FCA) warned crowdfunding was leading unsophisticated investors to lose their money; the Council of Mortgage Lenders (CML) stepped in to warn property people to be careful about crowdfunding investments.
The FCA wants to see tougher regulation for crowdfunding, an investment sector that has increased in value by 175% to £1.3 billion in less than a year.
The CML repeats advice from the Royal Institution of Chartered Surveyors warning property investors to look closely at crowdfunded projects offered by investment firms as house prices have yet to stall or fall since the business model came into being.
“We don’t know what effect a falling market will have on investments,” said a CML spokesman. “If investors are shareholders in a company, they are liable for debts as well as profits and if the value of a property falls below the purchase price they need to have an exit route planned.”
The CML agrees that crowdfunding is a way into property for investors who cannot afford to finance their own buy to let project – but that also presents the problem that these are investors with limited financial resources.
“How a downturn might affect crowdfunding is yet to be seen,” said the CML spokesman. “The risk is someone on a tight budget could lose more than they expected.”
The FCA and CML both highlight that some crowdfunding firms massage the likely returns of their projects by missing out information such as tax on chargeable gains on disposal of a property, the cost of repairs, funding rental voids and tax on any dividends received.
“Prospective investors need to read their contracts carefully because we are concerned that some of these firms are dressing up their investment packages without bringing all the financial information about risk and charges before the eyes of investors.”
Property Crowdfunding is a Huge Risk for Buy to Let Investors, Consumer Watchdogs have Warned – http://t.co/tBgT7zlqdK
— LandlordZONE (@LandlordZONE) February 17, 2015