What Is Crowdfunding and How Does It Relate to Property?

2017-11-21


Crowdfunding has transformed traditional big outlay investments by seeking many potential funders to invest chosen amounts into business ventures. It has been seen to help many small businesses, projects and enterprises which may not have otherwise received funding from traditional sources such as banks[1].
Through crowdfunding, a form of alternative finance, businesses and entrepreneurs can seek financial support from a range of investors, who can then reap the potential benefits should the business venture be a success. One of the advantages as an investor is you choose your level of risk by deciding how much money you want to invest. In some crowdfunding schemes, you can invest as little as £5[2].

Three Types Of Crowdfunding

As with any new investment method, crowdfunding is still growing and developing. Usually, investments are made through an online platform which can then be administered by the business for their use.

There are three main areas that crowdfunding covers:

  1. Debt Crowdfunding – by this method, you should receive money back with a level of interest. Cutting out banks, this offers a new approach to peer-to-peer lending. In some cases, people will invest money with no interest paid on the return for a good cause, another term for this is microfinance. However, this method is not without risks.
  2. Equity Crowdfunding – to receive shares in a venture, investors will exchange their money for equity which, if the venture is successful, means the value of the shares will increase. Of course, if the value of the shares decreases, you could stand to face a loss.
  3. Donation Crowdfunding – For those are not financially motivated and want to invest in a venture because they believe in the cause, donation crowdfunding allows them to invest for their own motivation while they may receive acknowledgement and gifts for their donation.

What is property crowdfunding?

Allowing a broader range of property investments and an opportunity to spread risk across a number of ventures and provide you with more investment opportunities, property crowdfunding allows you to invest funds in bricks and mortar property without the need for a mortgage or the potentially large cost of purchasing a property outright.

For a comparably smaller investment, compared to an outright property purchase, property crowdfunding means a group of investors with lower individual outlay[3] being able to potentially take advantage of high-yielding property in the commercial and residential sectors.

Property crowdfunding can cover many areas from renovation projects, buy-to-let purchases, land development and secured property loans. For many property crowdfunding platforms, the investors will be buying shares in the property venture, which separates the investments from the platform[4], providing an additional layer of security.

Benefits Of Property Crowdfunding

1. By investing smaller amounts into a number of ventures allows you to spread the risk. 2. You have control and transparency of which properties and ventures you wish to include or exclude from your portfolio. 3. Potential to reap rewards of property income without involving yourself in property management[5]. 4. In the UK, can have a positive effect on the housing crisis e.g. if a new development, and in the long-term society in general. 5. If you need to sell your shares, there may be secondary markets and liquidity available, even though property is known for its high illiquidity as an asset.

If you want to find out more about property development crowdfunding, read our five benefits of property development crowdfunding blog post.

As with any investment, as well as potential benefits, there can be risks too. Make sure you fully understand your investment before entering an agreement and seek financial advice if needed.

Sources:

  1. Entrepreneur / Why Equity Crowdfunding Matters To Small Business
  2. This Is Money / Crowdfunding Does Work
  3. Telegraph / Beginner's Guide to Property Crowdfunding
  4. Moneywise / Property Crowdfunding
  5. Investopedia / Pros and Cons

Your capital is at risk if you invest in property. This includes illiquidity (the inability to sell assets quickly or without substantial loss in value), and the loss of invested capital if the wider property market or an individual property suffers a reduction in value. Investments on Homegrown are not covered by the Financial Services Compensation Scheme. Past performance and forecasts are not indicative of future performance. For more information see our full risk warning. Homegrown Group Limited is authorised and regulated by the Financial Conduct Authority (FRN: 694952). Investments through Homegrown are equity investments.
Future performance is not guaranteed and is based on projections only. Your capital is at risk if you invest in property. For more information see our full risk warning.