Many property investors have realised, and more are still realising, that property crowdfunding can pay huge dividends. It can be fast, lucrative, and you can charge a 12.5% management fee for sourcing tenants.
The potential for huge profits from this method of raising finance is something that we at White Box Property Solutions can attest to. But first – how does property crowdfunding work?
Property crowdfunding in a nutshell
While the intricacies of property crowdfunding should be carefully considered, we have spent several years smoothing out and optimising our crowdfunding process to ensure that we (and those we raise finances with) rake in as much capital as possible from our crowdsourced buy-to-let investments.
The basic system asks investors to put money into the purchase of a property to receive a return on the rental income. This means that investors buy shares in the property and gain access to any of its future capital gains, depending on the extent of their investment.
Investors can also sell their shares at a price they decide upon, but only if other investors wish to purchase them.
Top 5 reasons to use property crowdfunding
There are many property crowdfunding companies on the market, but our experiences are mainly based upon using Funding Circle.
The following top 5 reasons to dive into property crowdfunding are based on what Funding Circle offers and what we have experienced during our own property investment journey. Different property crowdfunding platforms will offer different conditions, so we recommend you put in your due diligence and spend time researching a variety of companies before investing.
Let’s look at what we think of as the most helpful, convenient and lucrative benefits of property crowdfunding.
Funding Circle will pre-fund a development instead of the retrospective funding a bank will offer. This means they will give you the first tranche of the development finance to get the project moving from day 1. In contrast, a bank will generally replace your money after you put in the first tranche, which can have a massive impact on your cashflow throughout the project and leave you short at the end of the development.
With pre-funding, you simply request the next stage payment before you need it, prove what you spent to the lenders surveyor, and they will post the next phase on their platform. Most will let you predict your expected costs for up to six weeks in advance to help with cashflow throughout your property investment.
2. Less tranches
A tranche is a drawdown of part of the total agreed loan. From my experience a bank will require 6-8 tranches on a relatively small/medium development (there were 8 when I just built my family home for a loan of less than £350k).
Funding Circle just had 3 tranches for both of our most recent developments, which were 8 houses (£600k loan) followed by 11 houses (£750k loan). This allows you to get the funds into the bank early to ensure that you have the cash to keep the project moving when you need to. Also, as already mentioned, every time you take a drawdown you will need a surveyor to sign off the progress and spend on site. There will be a cost incurred by this, meaning that the more drawdowns you have, the more professional fees you will be charged.
3. No exit fees or early redemptions
Although with Funding Circle there is an arrangement fee of 2-3%, you will get this with any commercial lender. With most you will also get an exit fee and/or an early redemption penalty upon completion, or if you try to pay the loan back early. This can be 1-3% of the loan or even Gross Development Value!
In practical terms, if you were to finish the project early or sell some units off-plan to generate some deposits, there is no penalty and you don’t pay interest on what you don’t borrow. With traditional lending, you typically pay for the agreed loan for the agreed term, no matter how long you have it for or whether you borrow the whole lot or not. With Funding Circle specifically, you only pay back what you borrow, and if you don’t draw down the full loan or pay back early, you don’t pay for it! Simple. The reason for this is that they don’t request the funds from their investors until you need it, so there is no bad debt in the system.
4. Easy process
Crowdfunding platforms can move faster, as they quite often need the projects to fulfil the needs of their investors. The investors are often committing much smaller funds, so the risk is lower to them and the returns can be healthy. For example, 9,500 investors committed an average of just £42 each for one of our loans of £600,000! Each one of the 3 tranches for this site was filled within 5 days!
This aspect doesn’t necessarily mean that each person invested just £42, of course. The bigger property crowdfunding platforms have an ‘auto bid’ feature, which allows the investor to split their investment into smaller chunks, and the system places the smaller amounts into several different projects. This gives the investor added security for their property investment, as it’s spreading their risk. If one site fails for some reason, they are only exposed to losing a small amount.
5. Multiple sites
Once you start working with Funding Circle or the like, they will back you on multiple sites at the same time – as long as the figures stack up for each one and you keep paying them back when you are supposed to.
We have used these property crowdfunding platforms several times and have found them to be a much simpler and a refreshing alternative to traditional/bank lending. It has allowed us to build our portfolio quickly and efficiently by using a combination of private funds, property crowdfunding and bank term loans. When you learn how to do this stuff well, it really does work!
Our success with property crowdfunding is a testament to the power of the platform. We are not suggesting that you consider it to be your sole method of raising money, but it can be used successfully alongside joint venture financing, traditional lending methods and bank loans to provide you with another solid weapon in your fundraising arsenal.