What You Need To Know About Property Crowdfunding

by Lea Emery on 1st October 2018

What Is Property Crowdfunding --- And Is It A Good Investment?

There's no doubt that crowdfunding is an idea you'll be familiar with --- you've seen people donating money to help a new invention get on the market or to help someone reach their crowdfunding goal. But what you might not have realised is that crowdfunding and crowdsourcing are increasingly becoming a powerhouse in property development. In some ways, it's not a new idea. The House Crowd, one of the most popular property crowdfunding sites in the UK, has actually been around since 2011. But the last few years have seen a definite increase in popularity and press surrounding the peer-to-peer lending market.

And the market itself is getting bigger. Property Moose, another major crowdfunding property site, has nearly 30,000 members, and new opportunities are popping up all the time. But if you're not familiar with the ins and outs --- or you're new to property investing --- it can all feel a little overwhelming. How does crowdsourcing property work? And is it worth it? Here's what you need to keep in mind.

The Basics Of Peer-To-Peer Lending

For many of us, crowdfunding is synonymous with Kickstarter --- but property crowdfunding isn't exactly the same as getting an early bird offer on an innovative backpack or water bottle. Instead, with property crowdsourcing what we're talking about is peer-to-peer lending, which essentially means cutting out the normal middleman --- the bank. Your money, along with a lot of other people's money, is being lent to a developer or property owner. Because it will take many investors to reach the desired loan amount, it's called "crowdsourcing" or "crowdfunding".  And, potentially, there are some big rewards. You're usually lending money through an online portal, and the interest you earn is often higher because there's no bank getting involved and taking their share.

What's The Catch?

A lot of property crowdsourcing companies promise huge returns --- and, it's true that in recent years the property market has delivered. Between 1997 and 2016, the property market has gone up by an average of 11.65 percent year-on-year. But there are a few things to keep in mind, the bottom line is that just because the market has performed a certain way, doesn't mean it will perform that way in the future. Like any investment, there are risks.

The other thing you need to be sure is how safe your money is. One of the benefits of lending money within the property market is that your loan is often secured against the property itself. But that's not a guarantee. For example, the House Crowd website gives the disclaimer: "Every loan is secured on the borrowers' property with a legal charge. If the borrower fails to repay and we cannot sell the property for a sufficient amount to cover the loan you may lose some of your capital." Now, on the one hand, this is true of virtually any investment in any area, but on the other hand, it's crucial that you don't let slick websites and large interest rates make you think that anything is a sure bet.

Is It Worth It?

There are a lot of benefits to property crowdfunding. Depending on the site, you can start investing with as little as £100. Many of the sites will also let you choose the exact project you want to invest in or some, like the House Crowd, gives you an auto-invest option where your investment is diversified. But, like any investment, there are risks. The best way to decide if it's the right choice for you is to do your research --- a lot of research.

That's especially true now, as more companies start to emerge. As crowdsourcing starts to bubble, there are no longer just a few big names to choose from --- companies are popping up to jump on the bandwagon. This means more choice for an investor, but also an increased need for vigilance --- make sure that your investments are as safe as possible by reading beyond the promised interest rates. Make sure you're looking at somewhere reputable, who has jumped through all the legal hoops and makes you aware of the risks. If it seems to good to be true, it probably is.

There's no doubt that traditional lending methods need a little disruption --- banks take huge profits, while savers struggle on meagre interest rates. It's great to see new companies and models of lending emerge --- and crowdsourcing property development is definitely an exciting new area. But it's your money --- make sure you're investing it responsibility.

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