Article by Colin Davison
There’s a lot of change happening in the marketplace with the options available to investors and savers going beyond the traditional banks and starting to look at crowdfunding. This is change has happened over a long period of time and now it’s becoming more mainstream for investors to be looking at crowd funding to ensure that their investment and their development works out well . This article is too explore the various points surrounding that decision for somebody to make.
The volume of crowdfunded property projects now exceeds £1 billion on the average value of a project currently sits at 440,000 pounds with a yield averaging around the 10% mark. Approximately 65% of crowdfunding projects are debt based, that means that you have a security as part of it. The remaining 35% account for equity-based deals which are clearly at a higher risk but offer greater reward for those investors putting money into this option. It’s very likely that this trend in crowdfunding will only grow as a result of banks having greater caution on their available finance and with a greater value of projects that are out there.
Property crowdfunding essentially works on an online web platform we’re both investors and companies looking to obtain finance meet, affectively an eBay of financial loans. Although I have to point out at this point there is an awful lot more effort in listing your requirement for a loan and regulations attached to it thankfully so it’s not as easy as listing on EBay for getting rid of your unwanted Christmas presents.
So in order to ensure that every entity is completely fresh and checked out the platform provider creates a fresh new company for every opportunity that an investor will be investing in. This is often known as a special purchase vehicle or SPV for short.
I will produce a separate article covering the different types of property funding websites however from the review of the online platforms that we have available to us they range from peer to peer lending which is affectively on individual individuals lending set sums of money two more very structured development opportunity websites where the focus is on the body into the development itself as opposed to a capital sum.
So what is an SPV. This is a separate legal entity usually a limited company for tax purposes created for the sole purpose of the new development and therefore it is completely separate to an existing company that has already traded. It is created so that private individuals can purchase shares in this new venture and they will be protected under UK Companies Act legislation that supports there interests.
In an equity deal the company well affectively trade and the returns will then be available to the investor after the company is liquidated and all capital is distributed back to the investors in the company.
So property crowdfunding is then fairly easy to understand and doesn’t pose many difficulties investing in . However, there is a lot of considerations which you need to be considering to ensure that is both the right investment for you and delivers on everything that you’re expecting it to deliver on. And being an accountant which often will see when things go wrong it’s really important to ensure that you’ve got a good agreement in place and therefore I’ve decided to create this article to cover all the relevant tips to ensure that your investment is as smooth as you could expect it to be.
We will have ever covered the various tips and questions to which you should be discussing with your accountant or professional advisor who can support you on these decisions.
1. How much cash? – Ensure you do not need to rely upon it.
Okay so the first thing you need to be aware of is how much money will you be offering to put into this scheme. It is likely that there’s going to be a minimum criterion for every investment opportunity that’s available to you and worst at the time of providing this review I can see that the minimum can be at £25,000. Important is to ensure that you have sufficient funds to cover your everyday expected expenditure and that this sum that you are investing is clearly not going to affect your current cash flows and you are not going to require it over the period of the investment. You must consider that several projects will overrun in terms of time and therefore you do not wish to over commit.
May want to consider not putting all your eggs into one basket and therefore looking at different schemes I’m putting a different sum into each so that your returns will be less risky.
As a basic principle, putting all your investment eggs in one basket is never recommended. Let diversification be your watchword. You should ideally put your money into a number of different asset classes other than property and, within property, consider spreading your money over a number of property JVs in different projects, in different types of housing and in different parts of the country.
For instance, it might not be a good idea to invest in another site in an area that’s close to your other investments. If that area takes economic or employment knock, then you’ll be protected if you’ve spread the risk geographically.
2. What’s the return that the developers are forecasting for this investment?
They were saying that you would get will vary depending on what your risk and reward is and will also vary depending on your time that your committing to it and the locality of the property . Ultimate pens on how well you sell the opportunity and how keen the buyer is too take the opportunity on . In this case the buyer of course is the investor willing to invest his money. Speaking to people in this sector we have a rough figure of 8% secured as a first charge on the property. The next rate up is I figure of 12% for debt which is not secured and then finally we have a range of 20 to 27% for investors looking to get an equity return.
Planning gain – How does it compare with what you could earn on other property deals, or on other classes of investment? Does it beat them by a long way, in which case, how are the developers hoping to achieve that? If it does, then you should ask yourself: is the deal too good to be true?
When it comes to investing, it may well indeed be too good! If something looks too good to be true, it probably is. As a rule of thumb, the property in the UK should get you a return of 5% on equity, and from crowdfunding, there As an indication, according to the Kent Reliance Buy to Let Britain report, the average rental yield on a UK buy-to-let at the end of the third quarter of 2016 was 4.4%.
On the other hand, returns from property crowdfunding, such as JV property investments, can be more than 12%.
3. Ensure you think of HMRC and the tax liability!
Is this investment going to have tax implications for you, such as capital gains tax and, if so, have you taken them into consideration?
If you are not sure what your liability to tax is on the property strategy you will have to pay tax, CGT, potentially national insurance and a whole stack of other things. There are stories for investors to see much their profits wipe out by not understanding the tax liability.
4. What is covered in the details of the agreements?
Yes, it’s a bore, but it’s always to be advised. Your solicitor is a must in your power team for the transaction that you will be expecting to manage. If your purchase is on an auction you will need to ensure all the legals are tried and tested before you step foot into the auction room.
There are going to be add on fees associated with the deal and you will need to be factored in.
If you do not ask questions before, you will need to ask before you sign on the dotted line. No deal is better than a bad deal.
5. Capital duration?
How long a period you can tie up is not always so critical but what is, perhaps is the issue of how reliable the timing is. No investor likes uncertainly. You must ensure you only allow the covered to what you can. Have you allowed for any unforeseen emergencies that might mean you have to get your hands on cash in a hurry?
6. Do your background due diligence on the investment company and platform?
Do you trust the platform which is hosting the deal? Does it do any due diligence to vet the project? How long has the platform been around? Does it get any favourable or unfavourable mentions in the press or in the online media? Is it authorised by the Financial Conduct Authority
7. How much do you know, or can you find out, about the site for the proposed development?
Is it in your area and are you familiar with it? Is there likely to be demand for the kind of homes being proposed? Is it in an area that is forecast to become popular, or has it been popular for some time, so that perhaps prices have peaked?
Are there plenty of jobs available in commuting distance or is a major employer shutting up shop? If the development is for executive family homes, are there good schools in the neighbourhood?
Ask yourself all the questions a prospective buyer would asking.
8. What do you know about the property developer?
How long have they been in business? Have they got a track record of delivering successful projects?
9. What do you know about the other investors?
If the platform is a co-investment platform where angel investors or institutions invest alongside ordinary retail investors, then it’s probable they’ve done some due diligence of their own and have satisfied themselves that the project is viable and likely to make a profit.
10. Ensure you are competitive, there is a deal to be made?
Make sure you have sufficient deals to ensure you get the best deal. Shop around.
Property crowdfunding is a great way to find your next funding, please ensure you enjoy the process.
For support on the property investment, crowdfunding, please make sure you call Colin Davison firstname.lastname@example.org 01256 830000