This week we examine the risks and potential rewards of property investing and how online property crowdfunding platforms may benefit your investment strategy.
Alternative Finance refers to the arrangement and deployment of investment (by individuals – such as Brickowner investors) to businesses outside traditional institutions (such as banks). For example, within property, this includes platforms that aggregate smaller sums in order to provide funding to property asset managers and developers. In return, investors receive a share of the profit or income from the investment.
What are the potential risks in investing through online property crowdfunding platforms?
1. Lack of control of development projects
Property investors that use crowdfunding platforms do not have direct control over the property they are investing in. This may deter investors that prefer to have a more hands-on approach to their investment where believe they can add value.
On the other hand, this can also be seen as an advantage. Control of the property is passed onto property managers who act on behalf of a pool of investors, who can benefit from earning a return without having to be involved in the administration of the asset.
Ultimately, liquidity comes from selling a property, which raises questions around when the property will be sold once developed, and how easy this will be to do. These apply to traditional and crowdfunding property investments.
Of course, the value of the property can go up or down. In circumstances where the investment is not performing well, some argue that the crowdfunding platforms can offer a more defensive investment through diversification. With higher diversification levels, the negative impact made on the poorly performing investment will have a lesser impact on the portfolio as a whole. This is advantageous relative to offline, traditional property investing, which tends to be much more concentrated on just one asset.
What are the potential rewards from investing through online property crowdfunding platforms?
Diversification is a crucial part of balancing risk and returns. By enabling investors to invest smaller sums in a deal, crowdfunding allows them to diversify across different assets. Without property crowdfunding, investors are more likely to need to invest their money into just one property asset to meet the higher minimum investment. We see this as a main benefit of crowdfunding investment structures.
In addition, with a wide array of sub-sectors within the property industry, investors can spread their investments across sectors as well as into different assets, be that residential, commercial, or bonds. This will balance the strengths and weaknesses of each asset class, which will help mitigate risk.
2. Tax efficiency
Crowdfunded property investments typically pay tax on dividends and capital gains. Investors choosing to invest in property will also avoid stamp duty tax (due to the structure of the investment). Of course, you should always check the tax consequences of any investments being considered, please seek your own personal tax advice before investing.
3. Investing Online
Investors are able to access the property market and manage their portfolios irrespective of their location, which particularly benefit foreign investors who struggle to gain access to the UK housing market. Being able to manage a portfolio of property investments all in one place, through one platform, makes it easier for investors to invest, and to monitor their investments.
4. Property Management Expertise
Investments on platforms usually go through a due diligence process carried out by the investment platform. Information is presented online to investors in a concise, transparent, and efficient manner, which can help inform the investors on making decisions about where to invest.
5. Potential Returns
Property investments can return money to investors in a number of ways, as dividends, income, capital, etc. Platforms keep all this in one place, in one account, making it easier for investors to see those returns come in, and to transfer them out to their banks. Even if the investor has diversified across different deals managed by different companies, all the money in and out goes through the one platform. This makes it easier to keep on top of a portfolio of property investments.
In summary, crowdfunding platforms make it easier for investors to diversity across deals, developers, and asset classes whilst keeping all the information and money in one place, with one easy way to access it.