Property Crowdfunding Tutorial

Crowdfunding is an exciting area that I engage with as an investor and will certainly consider for my own development projects in the future too. It forms part of the alternative finance market and provides a way for people to raise money through online portals to finance their activities, and for investors to provide that money looking for a decent return. This tutorial focuses on property crowdfunding.

The potential rates of return being from around 7% to as much as 30%, depending on the level of risk, appeal to investors given the low interest rates available to savers. The tightening-up of bank lending in recent years has also made crowdfunding more attractive for those seeking funds for their projects.

Many property projects offered have a focus on property development or refurbishment and/or planning gain, although some may have the aim of renting-out the property to benefit from expected capital appreciation over time. In the latter case, the developer will usually refinance in order to pay back the crowd.

The timescales for projects from the crowd’s point of view, are normally between 1 – 2 years.

The Financial Conduct Authority (FCA) is responsible for the regulation of crowdfunding. There are several crowdfunding platforms offering property projects for developers and investors. I have mainly used Simple Crowdfunding and CrowdProperty.

Most property crowdfunding platforms charge fees between 3 - 5% to borrowers raising the funds but do not charge fees to investors.

The highest risk investments can be “planning gain” type deals, which depend on planning gain for the plot to have any uplift in value. Investors can lose everything if the planning application fails.

You should also consider the developer or fundraiser themselves. How experienced are they and what is their background? Do some due diligence by Googling their name and looking them up at Companies House for example.

Debt Based Crowdfunding

Debt based crowdfunding is sometimes also known as loan-based, or peer-to-peer lending (P2P). This is where consumers lend money in return for interest payments and a repayment of capital at the end of the investment period, normally a fixed term, without becoming shareholders in the company doing the development.

A 1st or 2nd charge (giving a legal claim in the event of default) against the property is normally taken, sometimes by the platform hosts on behalf of investors.

Given the lower level of risk in this form of crowdfunding project when compared to the higher risk level inherent in equity based projects, the rates of return for debt based projects are normally lower, often between about 7 - 10%.

IFISA

The Innovative Finance ISA (IFISA) was introduced on 6th April 2016 to allow individuals to earn tax-free interest on peer-to-peer (P2P) lending activities, which is available for debt based projects but not equity based projects.

An IFISA is a form of ISA, a savings and investment account that you never pay tax on. You can save up to a maximum of £20,000 in 2019/20. This is subject to annual review, for the latest maximum annual allowance check the ISA page on www.gov.uk. While you can invest in multiple deals, you can only open an IFISA with one platform in a given tax year.

Equity Based Crowdfunding

Consumers invest directly by taking shares in the special purpose vehicle (SPV) set up for the project by those bringing the deal to the platform.

Expected returns are often set at higher rates normally from 10 - 30%, reflecting the greater risk than for debt based projects that promise fixed interest returns with the added assurance of a 1st or 2nd charge over the property. Although investors become shareholders in the company in the case of equity based deals, if there’s no profit then they may receive none or even lose capital.

It must of course be appreciated that there is a risk of capital loss whichever form the investment takes.

What Is Auto-Invest in Crowdfunding?

Some platforms have the facility for investors to set up their account to auto-invest in projects. This can be particularly useful when projects on the platform tend to fill up very quickly. On one platform that I use, projects typically become fully funded within minutes if not within a couple of hours, so I often missed out on investing before I set up auto-invest!

Registering as a Crowdfunding Investor

Unless you register with a platform, you can only see a summary of deals available and already funded, you will not have access to further details and documents, or be able to invest, until you register.

You should be asked to declare your financial status, in keeping with FCA rules. Firms can only make direct offer promotions to retail customers who meet the criteria, so you will be asked to verify if you fit into one of the required categories:

  • As a High Net Worth (HNW) or Sophisticated Investor; or
  • Confirm you will invest less than 10% of your net assets in this type of security; or
  • Take independent regulated advice.

As a High Net Worth Individual or Sophisticated Investor, it is assumed you understand the risks and can afford to take them.

To qualify as a self-certified sophisticated investor, you should be able to meet one of these criteria:

  • You have been a member of a network or syndicate of business angels for at least six months before the date of self-certification; or
  • Have made more than one investment in an unlisted company in the two years before the date of self-certification; or
  • Work in a professional capacity in the private equity sector or financing small and medium enterprises (‘SMEs’) in the two years before the date of self-certification; or
  • Been a director in the two years prior to self-certification of a company with annual turnover of £1 million or more.

To certify as a High Net Worth individual, you should be able to meet one of these criteria:

  • Having an annual income of £100,000 or more during the year immediately preceding the date of self-certification; or
  • Having net assets of £250,000 or more - not including a primary residence, rights under an insurance contract or pension or termination benefits.

Raising Money for Your Project From the Crowd

Crowdfunding investors

Consider whether the type of deal and the returns you are prepared to offer match the expectations of investors and whether you have the right sort of credibility to attract investors. If possible, aim to attract at least some investment from your own crowd, but take advice from the platform about what you can or cannot do with regards to promotion of your deal as this is highly regulated activity and you are not allowed to advertise or promote the details of the deal.

Platforms vary on the exact requirements for borrowers, but the main document required is the business plan which should include details of the opportunity, the reasons for the raise, provide photographs, floor plans and a map, your team’s background and experience, the history of the company or special purpose vehicle (SPV), what security and returns are offered and so on.

Once you have got all your documents uploaded to the platform, the host will check them prior to approval before your deal can go live. Then investors will be able to invest and assuming success in raising sufficient funds, the project can go ahead. Congratulations, you are a crowdfunder!