How to be a property investor: Property crowdfunding
If you don’t have tens of thousands of pounds to invest, or hours spare to manage tenants and maintenance, then crowdfunding offers a new way to invest in property.
Crowdfunding has captured the mainstream imagination in the past few years. The concept is simple: a large number of people each invest a small amount of money to fund a project or venture.
Although the concept started life as a way to fund offbeat creative projects, crowdfunding has become a popular way to invest in bricks and mortar with an ever-increasing number of specialist property crowdfunding websites touting for business. These include The House Crowd, Property Moose, Property Partner and Crowdlords.
Typically, a crowdfunding platform allows individuals or businesses to explain their project – a property in this case – in a pitch with the aim of attracting investment from as many people as possible. Property projects on offer include short term renovation projects, secured loans, bridging loans, and long term buy-to-let.
Technically, property crowdfunding involves buying shares in a special purpose vehicle (SPV), a type of limited company set up solely to purchase a particular property. Investors’ money is ring-fenced and protected so it will be safe should the crowdfunding platform run into financial problems.
The attraction of property crowdfunding is clear: although property investing has traditionally delivered good returns, it can be an expensive and time-consuming business. Typically, investors need a hefty cash deposit plus eligibility for a buy-to-let mortgage. They also need to have the time to maintain a property and manage tenants.
Crowdfunding allows people to invest in property without the need to get a mortgage or manage tenants – the latter is done by the crowdfunding site for a monthly fee.
People can often invest with small amounts – from as little as £50 with Property Partner (see table below). You simply register as an investor on the website and select those properties you want to invest in.
Minimum investment required by each crowdfunding site
|The House Crowd||£1,000|
Source: Moneywise, using firms’ websites as at 22 July 2016
Crowdfunding vs peer-to-peer lending
Although both part of a new wave of property investment options, there are some fundamental differences between peer-to-peer lending and crowdfunding.
Peer-to-peer lenders such as LendInvest are debt-based lending platforms. Each investor submits the amount they want to invest for a particular property and, once approved, they earn interest on their money. In short, they are investing in a loan or debt secured on a property.
Crowdfunding is different in that investors are contributing cash in return for equity or a stake in the property. They make their money from both rental income from tenants and capital growth.
In both debt and equity lending, investors are freed from worrying about the changes in taxation for individual landlords. From April 2017 landlords will see the tax relief they can claim on mortgage interest slashed to 20% while, since April 2016, they have already been paying a 3% surcharge on stamp duty rates.
The Financial Conduct Authority advises consumers looking to invest in crowdfunding to take care. Given the typical risks involved, the FCA has ruled that firms are only allowed to promote crowdfunding to particular types of experienced investors, or ordinary investors who confirm they will not invest more than 10% of their net investable assets in crowdfunding projects.
Don't miss the previous articles in this series:
- Our national love affair with property
- A history of property prices
- Property versus pensions
- Buy to let: Buying a property
- Buy to let: Letting it out
- Buy to let: new taxes for landlords
- Understanding property taxes
- Alternative ways to invest in property
- Commercial property funds
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.