Crowdfunding new property developments is a great way to earn attractive returns from property investment. You don’t need intricate knowledge of the property market, nor do you need a huge amount of starting capital. It also contributes positively towards solving the UK’s housing shortage. Several properties that are being built for the government’s Help to Buy scheme are financed via crowdfunding, meaning investors are actively helping people get on the property ladder.
Many peer to peer property platforms now offer crowdfunding for property development as an investment option. However, if you’re looking to get involved in property development crowdfunding, there are some things you should do before investing your money.
1. Check how your investment is protected
Just because you are not directly involved in choosing who is working on the property development, it does not mean that you should be left in the dark. Try to find a peer to peer platform that has full control over the development, as that is a good sign that you’ll have better insight into what’s going on, too.
Peer to peer platforms should offer different ways to protect your investment, via a first legal charge against the land and property. In short, this means that your investment is protected if the borrower defaults, because the developer could still force a sale to safeguard the money invested.
Any reputable peer to peer property developer should also be able to ‘cross collateralise’ across different developments in order to protect its investors. In practice, this means they should have someone in place who continually assesses whether investments are at risk. If they are, they should have a system in place whereby they look at the revenue generated from other developments to make up any shortfall in the investor’s return of capital, before the developer takes their profit.
2. Make sure your developer of choice conducts due diligence and research
The developer and the platform should undertake a significant amount of research before launching a crowdfunding campaign – and they should make that information available to you. Some questions to ask of them include:
- Has a RICS survey been completed?
- Do you have feedback from local agents?
- What are the recent sold prices of other properties in the area?
- What have been the prices per square foot achieved on similar properties?
It would also be wise to ask for any information on market liquidity and economic forecasts.
Of course, even if they have all the right answers to the above it doesn’t mean the investment will pay off. But it’s a good starting point to know that they have conducted a significant amount of research.
3. Confirm the development has secured planning permission
This one might sound obvious, but it’s surprising how often firms assume they’re going to get planning permission in advance of it actually happening. The process of getting planning permission isn’t as easy as it sounds and is hard to predict. In my experience, as a rule, nobody really wants a new development built near their home, so appeals from locals are common.
And even if the planning permission is granted, you could be subjected to further appeals and delays. So, make sure the planning permission process is fully complete before you invest – otherwise, you could be left out of pocket.
4. Work with the right people
Anyone who has worked with builders will know that delays are par for the course. But larger property developers shouldn’t have to deal with that if you they have the right contractors in place. A reputable contractor should be happy to commit to a fixed price design and build contract to ensure the project is delivered on time and at no more than the quoted price. This will cost the developer more, but reduces the risk of delays or unforeseen expenses.
5. Understand how your investment will be repaid
Fixed rate investment provides more consistent and predictable returns – even if the property takes a while to sell, you’re still earning interest until you are repaid. In order to know when you’re going to get your money, it’s perfectly reasonable to ask who in the investment chain will be paid first and in what order their money will be given back to them.
Some will pay all capital and interest back to the investor all at once, whereas others will pay back all capital before paying out interest.
6. Look outside London
Historically, London has been at the epicentre of property investment and development in the UK – but things have changed. There are plenty of reasons to be investing in the North West, for example, where the property market (particularly by comparison to London) is forecast to grow by 21% over the next 5 years.
The government’s ‘Northern Powerhouse’ campaign has encouraged business growth in the area, which has driven more people to move to the North West. It’s important to keep your eye on property investment opportunities outside of the London area to find those hidden gems.