I have a brilliant guest post from the lovely Abagail of senecarooms.com this week, and in it she talks about how crowdfunding could potentially be a great asset to add to your portfolio in order to grow your money and reach that net worth target you’re aiming for.
I hope you enjoy it!
Budgeting and Saving is Fun!
Doctor Nikki has taught you all about separating your money into different pots (See week 1 of “The Budgeting Series”) , and I imagine you are beginning to feel pretty proud of yourself as you watch them grow. If you are a results-driven person like me, saving money (for you) will be just like getting fit. Those pots of money gradually growing feel just as good as muscles on your body gradually firming up or your waistline trimming down. The results are tangible and obvious, so it can actually become quite addictive!
That is, until you receive your bank statement and see the measly returns you receive from the bank for all your hard work and discipline. With such low interest rates, building a sizeable pot (or pots) of savings will take forever! In fact, with inflation currently higher than interest rates, your money sitting in the bank is effectively getting a little haircut each year! So it goes without saying, it is wise to get your money working harder for you elsewhere.
It’s no wonder Crowdfunding opportunities are thriving in this environment. But, as with any new concept, there’s a lot to get your head around.
So why should you listen to me?
Well, a word of disclaimer here – I am no financial adviser – so I am not authorised to offer advice or make recommendations to you. I don’t run a crowdfunding platform, so I have nothing to sell. My name is Abagail and I‘m a HMO landlord (I own house-shares for young professionals), and I offer Virtual Management and consultancy services for time-strapped landlords who want to improve the performance of their investment properties. Above all though, I’m a property investor who likes to watch my money grow :-), and who likes to share what I understand and have experienced in the world. Today, I’m sharing with you what I’ve learnt about crowdfunding.
That said, now what is crowdfunding?
Crowdfunding is basically where a ‘crowd’ of people pool together to fund a project, product, business or investment, typically via a web portal. This can be done as a donation, or in exchange for shares, rewards, or interest on the capital invested.
Crowdfunding can be used in loads of different industries, but seeing as though property is my thing, I will give you an overview of the property crowds…
Most property crowd sites offer two types of investment – either equity based or debt based.
Also known as Peer to Peer lending (P2P), this is where you essentially loan funds to a company at a pre-agreed and fixed interest rate.
These loans are often used to fund all sorts things – different stages of a development project, improvements to a property, or even to fund business expansion projects not even related to the property.
In all cases, the loan is secured against a property, either as a first charge (just like a mortgage company – if the loan goes into default and the property is repossessed, a first charge lender is paid off first), or as a second charge (like a secured loan from the bank – again, if the the loan defaults and the property is repossessed, the first charge lender is paid off first, then the second charge lender is paid or receives whatever is leftover, if less than the initial amount loaned).
As you can see, first charge loans are more secure than a second charge loan, so the interest rate offered will generally be lower than for a second charge loan.
Are shares in a limited company called an SPV (Special Purpose Vehicle) which owns the asset and you receive a pro-rata share of profits from the property.
These equity investments can be for a simple Buy to Let property (where you receive a share of the rental income plus any capital growth), or an equity investment can also be offered for a development project, where you receive a share of the uplift in value of the property between the acquisition cost (purchase) and disposal cost (sale) less any associated costs along the way (architects fees, building costs etc).
The return you receive at the end cannot be guaranteed, so you will need to do your own due diligence to determine whether you believe the opportunity will be profitable.
Equity investments are more risky than Debt investments, so the returns can generally be a lot higher.
Remember, just as much as property values go up, they can also go down, so it’s best not to invest “speculatively” unless you really know what you are doing.
Is it safe?
Thankfully, the crowdfunding industry is heavily regulated by the Financial Conduct Authority (FCA), so each platform is required to jump through a LOT of hoops before they can work with investors and handle funds on their behalf. If this is a concern for you, maybe contact the FCA to learn more about it.
The crowd platforms are obliged to carry out a certain amount of due diligence before offering any opportunities to their crowdfunding investors. Even so, it is still advised that you do your own research into any opportunity you are interested to invest in.
I tend to google the postcode of the property and even call up some estate agents or letting agents in the area to ask their opinion on local values. I also ask whether the particular property type is in demand in that postcode or not (eg, one bed flats will likely be hard to sell or rent in a typical family area), and how long they imagine it would take to rent out or sell etc. Another good question to ask is “if I wanted the property to rent / sell within 30 days, what price do you imagine it would achieve?”. The answer will reveal what you can expect the property to realistically sell / rent for. Estate agents are professionals in their field, so don’t worry about calling – they love to share their knowledge.
Next, I want to look over the accompanying documents. I make sure I read through and understand the financials, the surveyor’s valuation report and the terms of any shareholder agreement (equity investments).
Exit Strategy is Important
I expect the property company to have worked out multiple exit strategies. What this means is that if Plan A doesn’t work (eg, selling all of the flats that have been built in order to repay investors), there is a Plan B in place (eg, they have an offer from a mortgage company which will enable them to release capital and pay off the investors). They will usually mention their exit strategies within their investor information pack.
Which Sites Do I Like?
One of my favourite property crowdfunding sites, simplecrowdfunding.co.uk, do something quite unique and share a little bio about the property company borrowing the funds, as well as info about the directors/key contributors and their credentials. I love this. It then gives me the chance to google each person, and to check the company performance on companies house before I decide to lend to them. I’m looking for previous track record, how long have they been doing this type of property work, what is their specialist skill, has the company been operating at a profit, has their name been linked to any failed businesses (not necessarily a bad thing, although I would be concerned if there were more than one failed business), has their name been linked to any scandals/fraud/criminal activity.
The more advanced type of property opportunities (for example commercial properties, planning gain or title split opportunities), the more due diligence is needed, so if you are keen to learn more about property (as I always am), use some of your 10% for education pot to get yourself educated. There are lots of books, webinars, blogs, training companies and mentors out there, and both Dr Nikki and myself would be happy to offer some suggestions for you.
How much should I put into crowdfunding?
At the beginning of the article, I mentioned the haircut our savings are currently getting when our money is held in a bank account. Even though this is the case, I would always keep my emergency savings pot in an easily accessible bank account and never invest it.
Investing carries more risk than simply saving, hence the higher returns, so a few good questions I ask myself each time I put some money into an investment is “how painful would it be to me if I were to lose this money in this deal?”, “if the property company were to default on the loan and there was a delay in receiving my capital back, would that be a problem for me?”, and “If I were to lose this money in this deal, would I be able to accept it as money spent towards my education pot?”
The answer will be different for everyone as we all have a different tolerance to risk, but always remember the purpose of investing is to grow our money and our financial wisdom.
Crowdfunding sites actually have limits to how much you are allowed to invest with them – typically 10% of the value of your assets (not including your personal residence) – unless you are a High Net Worth Investor or a Sophisticated Investor. The great news is that with crowdfunding, you can get started with really low investment amounts. At propertymoose.co.uk , you can get started with as little as £10!
Investing your hard-earned cash can be both scary and exhilarating, but if you remain sensible with your money, only invest what you are prepared to lose, do your due diligence on the deal and the property company receiving the funds, and invest some time developing your knowledge and experience in your chosen field / industry, your investing choices will feel more like educated choices rather than scary gambling.
I wish you all the best for your investing future!
If you want to find out more about crowdfunding, visit the UK Crowdfunding Association (UKCFA) website.
And there you have it! I thought this article was a fabulous read, and I hope you did too. Come and share your experiences over on my private facebook page – we’re a friendly bunch, and love to give each other encouragement and talk about our money wins. See you there!
Until next time,