Regulation and tax changes have over the years closed in on a once lucrative investment on the buy-to-let market.
For many landlords, the once profitable investments are more of an expense than an investment, as they face a 3 per cent stamp duty on second home purchases.
In addition, landlords now have forced upon wear and tear allowances along with the new requirements, including checking the immigration status of tenants.
Currently, landlords face hard times ahead as it comes a time when they will no longer deduct full mortgage on the interest costs.
By the time it's 2020 they will only be allowed to claim a basic 20% allowance. All these changes will drastically affect the once thriving buy-to-let market as they may affect the profit and tax perks offered.
For investors in the property market, crowdfunding sounds like a great alternative.
Property crowdfunding allows investors access to property offers with high yielding returns thus eliminating the hassle of managing tenants and collecting rental income. Like every investment property crowdfunding has its risks.
Types of crowdfunding
Investors have access to two types of crowdfunding, equity crowdfunding and debt/peer to peer crowdfunding.
Equity crowdfunding is companies that collect a pool of money to fund property development, in turn, investors earn considerable income from the rent paid and in some the share capital gain.
Using such platforms eliminates the increasing burden of regulation, legislation, and taxation. It also offers for passive investment and increases your property investment portfolio.
In debt crowd funding or peer to peer lending investors fund the property development through bridging loans and in turn receive interest from the repayments done by the borrower.
Currently, over 700 million Euros has been lent out for property development, according to a report by alternative finance industry a majority of that came from crowdfunding investors.
How crowd funding property investing works
In the traditional property market buy to let investors collect rent and deal with tenants directly; however, crowdfunding offers a hassle-free investment.
When you become a crowd fund investor everything from regulations to taxes is all handled by the company. In short, the property management falls on the company then you enjoy the returns from rental income and capital gain.
Additionally, property crowdfunding cuts off the financial and bureaucratic barriers to entry, and these way investors can spread their risk across different properties.
With platforms, they allow investors to buy shares in multiple properties cutting off the middleman thus offering even lower rates than mainstream agents.
The entry cost for investors is lower than your typical deposit with traditional buy to let mortgage. Other platforms have a minimum entry investment of 10 Euros while saving stream doesn’t have a minimum.
In comparison to traditional investment crowdfunding earning potential is higher, as investors you will not incur fees associated with buy to let mortgage.
As an investor you can earn returns ranging from 3.75 per cent up to 12.7 per cent.
Risks associated with crowdfunding
Crowdfunding is not a savings product offered by banks or other financial institutions, rather by platforms.
Although you gain returns as it's a risky investment with no definite guarantee. Before engaging in any platform make sure the
Financial Conduct Authority authorises it.
Besides, since these platforms are not in the mainstream, they are not regulated by the financial services compensation scheme protection.
Security on investment is not also guaranteed, if a platform goes into bankruptcy you also stand to lose your investment. There is also no guarantee if the property is sold the right market price.
When you use a platform, you are giving control to property investors, from finding the right tenant to the rental income. As an investor, you have to perform due diligence while choosing the project and platform.
Peer to peer crowd funding companies spread your money across multiple loans. Spreading your risks across different individual investments, this makes it harder to get your money quickly.
If you are looking to liquidate fast then
crowdfunding may not work well for you, in such cases, you might have to use the secondary market to sell your shares.
Crowdfunding like a traditional buy to let still requires developers and landlords, although both parties have a role to play there are still risks and rewards.
For land developers and landlords access to lending, platforms will ultimately grow their business. Property investment is risky due diligence is essential when dealing with online platforms also remember not to spread your risks too thin.