More and more platforms are launching, offering different opportunities such as the funding of development finance, long-term buy-to-lets and some with assured retail income. There are also platforms specialising in specific types of property, such as residential, student housing, industrial and office properties.
Sometimes property crowdfunding and property stokvel lending are thought to be the same thing, but they are both different.
Crowdfunding property investment is no different, in principle, to other types of crowdfunding. Pre-negotiated ready to go investment properties or projects come on the market are advertised on crowdfunding platforms, and investors are invited to contribute and invest.
Often there is a minimum investment amount but that can be a very low number (sometimes as little as R1500).
The Disadvantages of Property Crowdfunding
It’s not all sunshine and flowers – if it was that easy, everyone would be signing up to invest! Here are some of the disadvantages.
Investments can go down as well as up - Whichever way you invest in a property, the risks are broadly similar. Tenants might not pay the rent. The property could require extensive work. Or it might end up empty for an extended period. All of this means your investment might sink like a stone. There is also the possibility of mismanagement should the SPV be run by inexperienced people.
It’s new territory - Property crowdfunding websites are fairly new, so it’s difficult to say how safe or profitable they are in the long-term.
You are still reliant on a third party company - There is no guarantee that the site you use won’t go bust. If that happens, you will still be a shareholder in the SPV, but someone else will have to be appointed to take over the management of the company, which could take time. In the event this does happen, it’s not an ideal situation and you will probably lose money in the process.
The associated fees can reduce returns - Compared to traditional buy to let investment, returns are usually lower with property crowdfunding because of the fees.
No hands-on control - You don’t have control of the property. This is an arms’ length investment whereby the platform or its management company runs the property. If you’re not happy with the way your investment is panning out, there isn’t much you can do other than sell your share. If the platform spends too much on maintenance or makes other decisions you don’t like you don’t have any say in the matter.
You can’t see your investment in the flesh - Whereas a landlord can view their asset, as a shareholder on a crowdfunding platform, you are relying on the information given to you. You can’t go and check out the property or screen tenants. All you can do is hope the property you have invested in doesn’t have any major problems.
Can be difficult to liquidate an investment quickly - As we’ve already mentioned, it can take time to sell an investment share in a property crowdfunding scheme. If you are still within the minimum investment term, you may have to wait for another shareholder to buy you out, which might not happen quickly.
There may be penalties for an early exit - Some property crowdfunding sites set a minimum term before you can exit your investment. If you wish to exit during this phase, you have to wait for someone else to buy your share. There may be penalties for an early exit, so check this before you
The golden rule with property crowdfunding is to makes sure you understand the process before you invest. It’s undoubtedly a popular way to dip a toe in the property investment market.
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