Property crowdfunding: should you become a virtual landlord?

190513-property-crowdfunding — Should you buy into property crowdfunding?

Property crowdfunding is becoming an ever more popular way to buy into bricks and mortar. But think carefully before putting your money in.

Many people put their money into residential property, particularly buy-to-let. But with increased stamp duty on second homes and fewer tax breaks for buy-to-let landlords, that has become less attractive. Another way of putting money into property is through real-estate investment trusts (Reits), which own commercial property assets. But the rise of peer-to-peer (P2P) lending has opened the sector to a new audience, offering potential returns in excess of the typical 5%-6% of a traditional Reit.

The biggest platforms are LendInvest, which makes bridging and development loans and has lent out some £1.4bn, according to AltFi Data, which collates information on the P2P finance sector. Landbay offers buy-to-let mortgages and has lent out £166m, while Lendy, which finances development loans and property purchases, has made more than £400m of loans.

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Virtual buy-to-let

Equity-based crowdfunding is perhaps the closest thing to traditional buy-to-let investments you buy a share in a property (usually via a "special purpose vehicle" a company set up for that purpose) and the property is let out. You receive a share of the rental income in return, plus any profit if the property is sold. Examples include Yielders, Uown and Property Partner. A benefit of equity crowdfunding is its wide reach it can be used to invest in line with Islamic finance principles; because income comes from rent rather than interest payments, the products are sharia-compliant.

Debt crowdfunding

Debt crowdfunding is probably the most common form of property crowdfunding today. Investors lend money, often in the form of a secured bridging or development loan, to a property developer, which builds or renovates the property and repays the investment. Many platforms secure loans on the assets, which in theory should provide some protection if the developer goes bust, although it might not be easy to sell a half-finished development in Wolverhampton, for example and certainly not for the full price.

With property price appreciation dwindling in the capital, many platforms concentrate on the provinces, where the potential for capital growth is higher. For example, the House Crowd funds developments mainly in the north of England, and indeed builds properties itself via its House Crowd Developments arm. Another platform, the Blend Network, finances developments mainly in Northern Ireland, taking a first charge on a borrower's assets. But when the slowdown does reach the rest of the country, you could end up out of pocket.

P2P pitfalls

One feature of P2P is that you can pick a specific property to invest in. The flip side to this is that you are making a decision on very specific local markets where you may have little or no knowledge. How familiar are you with the residential market in Chorley, for instance?

Also, consider the illiquidity of P2P compared to Reits. Platforms may have a secondary market, but it could take a very long time to sell your investment, assuming you can find a buyer. Reits have the advantage of being traded on the stock exchange, and can be disposed of quickly if necessary.

Finally, if you really want to spice things up, it will soon be possible to take fractional ownership of property using blockchain. Several start-ups are now working on platforms that will allow property owners to "tokenise" their property, and sell those tokens to investors. But if you're not ready for the risks of P2P crowdfunding, you're certainly not ready for that.

Some of the biggest property crowdfunding platforms

Crowdproperty offers up to 8% a year for investors with at least £500, which can be held in an Innovative Finance Isa. Investors lend money to professional housebuilders.

Landbay offers up to 3.54% in its classic P2P or IFIsa accounts, investing in buy-to-let mortgages. £5,000 minimum.

Lendinvest offers between 4% and 7% investing in short term buy to let mortgages. £1,000 minimum.

Octopus Choice has a target interest rate of 4% from short-term property loans. £10 minimum, withdraw at any time.