Introduction
Property crowdfunding is a type of property investment whereby the funds of many investors (‘the crowd’) are pooled together and used to buy a property or lent to developers as a loan to finance a property development.
Typically, individuals contribute a small percentage of the total amount. This can be beneficial for several reasons: it’s a fast way of raising a large amount of money, and means investors wanting to commit smaller amounts can gain access to deals they wouldn’t otherwise be able to participate in.
Once purchased, returns are proportionately shared between the individual investors. For a property equity investment, this is typically rental income and any capital appreciation generated by increases in the underlying value of the property. For a property-backed loan investment, this is interest on the lent funds.
Example of how property crowdfunding works
Say you want to invest in residential property in Manchester, because you believe you can earn a regular income from tenants’ and you think property prices in Manchester will rise in the next five years.
Instead of buying a property outright, which is costly, risky and can take time, you can combine your capital with other individual investors who also want to invest in residential property in Manchester.
You do this by signing up to a property crowdfunding platform, and contributing £10,000 to a collective pot of money which is used to buy a rental property in Manchester. The property is bought for £235,000 and pays a net dividend yield of 3.5% (the yearly income from rent after all fees and costs have been taken into account).
You now own your share of the property, proportionate to the amount of money that you contributed to buying the property in the first place. You will earn your share of the rental income that’s earned from the tenants in the property, and benefit from any capital appreciation of your investment by increases to the underlying value of the property.
Over the next five years, Manchester receives investment from the local government into infrastructure and local businesses, which boosts the local economy, generates jobs, and leads to an increase of 25-30% in local property prices. The collective decision is made by the investors in the property to sell the asset. The property sells for £305,500, 30% more than investors paid for it, and the growth in capital is then returned to investors proportionate to their share in ownership.
The returns on your initial investment of £10,000 has been 9.5% per annum, or 47.5% over the five years. This is due to capital growth and a monthly dividend yield:
Your investment of £10,000 is now worth £13,000 because property prices rose in Manchester and the property was sold for 30% more than it was initially purchased at
Your investment will have generated £1,750 in dividend yield payments over the five years, paying 3.5% of £10,000.
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