The sharing economy is based on the idea that you don’t have to fully own something to benefit from it. Among other things, it’s changing how we think about ownership and having an impact on how we invest in property.
A decade or so ago, the only option for someone wanting to invest in property would be to buy a property in full or locate the funds for a deposit if purchasing through a mortgage.
In other words, until property crowdfunding came along, property was an asset class only investors with large sums of money could gain access to.
The concept of crowdfunding has been around for centuries, but the form of property crowdfunding as we know it today came about in 2012.
What is crowdfunding?
Broadly speaking, crowdfunding is a way of funding an investment, business, project or product by raising capital from a large number of people.
Each investor contributes a small amount towards the total amount required.
Property crowdfunding follows the same logic. It enables you to invest small amounts in a flexible way across numerous properties, instead of putting all your eggs into one basket.
Some platforms let you invest as little as £10, so the method is helping to democratise property investment by making it more accessible.
Let’s say you have £1,500 to invest in property.
You might decide to invest your money into different projects to diversify your portfolio. If all goes well and your investments start to pay off, you can increase your initial investments.
How does the property crowdfunding process work?
As with any investment, it’s important to understand the ins and outs of how everything works before making a commitment. Here’s a brief overview of the process:
Step 1: Find a property
One of the first steps is to choose the property project you want to invest in. Once you’ve found one you’ll be able to invest in the company that has been set up to own the property as a shareholder.
Step 2: Purchase the Property
After both you and the other investors have invested the capital and the company has the funds needed to buy the property, the property purchase is ready to be completed.
Step 3: Become a Shareholder
Once you’ve invested your share, you become a shareholder for the property and receive your portion of rental return and capital growth.
Compared with more traditional methods, property crowdfunding doesn’t require a lot of involvement on your part, which is one of the reasons it’s so attractive.
Tip: One of your first steps should be to make sure the crowdfunding platform or company you use is authorised and regulated by the Financial Conduct Authority (FCA).
What are the main benefits of property crowdfunding?
There are many benefits associated with property crowdfunding but as with any investment, there are also risks to consider. Void periods or refurbishments could result in decreased or no rental income being generated, for example.
Some platforms enable investors to contribute very small amounts, making it a viable option for a much wider pool of investors. What’s more, you don’t have to be a property expert to participate in crowdfunding.
With property crowdfunding, you can invest in as many projects as you like; after all, a diversified portfolio can potentially result in a much stronger yield.
There are so many different property options to choose from, including refurbishments, HMOs, serviced accommodation, developments and standard buy-to-let properties.
You can choose an investment time frame that works best for you and aligns with your current circumstances/ future plans (typically between 12 months to five years).
Usually only finished projects are placed on property crowdfunding platforms and you can invest in a matter of minutes (although it’s a good idea to take your time).
Property crowdfunding platforms
There are dozens of property crowdfunding platforms out there.
If you’re a beginner, it might be worth starting out with one of the well-established ones. They’ve been around for longer and have received more investment, so they tend to be more user-friendly.
You can always test and compare a few to find one that fits. You may also want to consider those offering secondary trading, enabling you to sell your investment before it matures if you think you might need to down the line.
Think about investing small sums in larger projects based in established regions to begin with in order to minimise risk.
You can always invest in “riskier” projects once you’ve got some investing experience under your belt!