The Pros And Cons Of Property Crowdfunding
Many people want to acquire a buy-to-let property. However, it’s not easy to buy and own one.
Before you can get your hands on a property in the UK, you’ll need to shell out 25 per cent of the selling price to qualify for a loan; while administration for an operational buy-to-let means dealing with demanding tenants and broken fixtures every day.
Many investment gurus recommend that you should diversify your portfolio if you’re planning to purchase a buy-to-let property. Obviously, this is pretty difficult for ordinary investors across the country, since some will have to gamble their entire savings on buying a second property.
As a solution to this problem, some companies are now offering property crowdfunding schemes for buy-to-let properties. These services take the concept of peer-to-peer financing popularised by Kickstarter and applied it to buy-to-let properties.
It sounds like a pretty good idea, but, like every decision involving money, you should first check the fine print before jumping into this investment scheme.
Crowdfunding for buy-to-let property is strictly offered by property websites for now, but they all operate using a similar process. They offer properties for sale on their websites. Then interested investors sign up with a group of other buyers interested in the same property. After that, you are an instant co-owner of a buy to let property!
Now, for the ugly side of this investment scheme:
In a setup like this, an investor lacks any control over the property. This means that you can’t track who are chosen as tenants, the amount of rent, management of the day-to-day operations, and how the overall costs are computed.
Another downside is that the crowdfunding firms reserve the right to borrow against the property should the operational cost outweigh the profits of the property. This is potentially damaging to your property’s value and you don’t have the power to oppose the company’s decision when they decide to exercise their right.
Additional cost is another problem that’s common with crowd-funded buy-to-let properties. One company demands 5 per cent upfront payment from the buyer and another 25 per cent share from the total profits and gains for the management company. Aside from that, buyers will also have to deal with standard costs such as legal fees, advertising fees, etc. which all eat away from the profits you’re supposed to receive.
The last and biggest drawback with crowdfunded properties is liquidity. If you want to sell a house fast, people usually discount the selling price to attract buyers. You can’t do this with your share in a crowd-funded property. If you want to sell your share, you have to follow the rules set up by the company. What’s worse, even if you do find an interested buyer, it’s not easy to figure out how much your buyer will pay for the share he or she is buying.
Don’t take this post as an advice to never enter crowdfunding. It’s not. I’m just here to weigh in the pros and cons of this new investment scheme to help newbie investors.
Remember, each situation is unique, so there may be times when crowdfunding becomes a very good idea. Just know the risks involved so you can take the necessary steps to mitigate them and make the most out of your investment.