Crowdfunded property development projects are great for home buyers and investors alike.
For investors, the pros are that you don’t need a huge amount of starting capital, nor do you need much previous experience. To a large degree, these projects have democratised property investment.
Likewise, for buyers, these projects can help them get on the property ladder - some of the properties built for the government’s Help to Buy scheme are now developed via crowdfunding.
However, with any type of investment, there are some things you should know before committing…
Choose your type of investment
There are now a number of platforms that let you invest in property development projects, and they’ll often provide different methods to do so.
You can invest in peer to peer development loans for the short term or in an Innovative Finance ISA for a longer commitment period, but with the potential to earn tax free returns.
In addition, most large development projects take years to complete and have multiple phases (to cover land purchase, construction, and other costs). Each phase may require a different loan, so you could choose to invest in a certain phase, or the whole project.
Depending on how quickly you want your investment returned and the type of return you want to achieve, there are a few ways to get involved, so it’s worth reviewing your options.
Find out who is working on the development
It’s usual for platforms offering property development loans to use third party property developers. This isn’t ideal, because it makes it harder to get a detailed insight into how the property is coming along when it’s in development.
By comparison, a peer to peer lending platform with its own development company will have much more control over its projects and be able to give you more detailed and trustworthy updates.
A development company should be working with the best people at every stage, even if it means paying more for them.
At a minimum, they should be working with a RICS qualified surveyor’s firm, a reputable employers’ agent, and contractors with a substantial balance sheet that agree to a fixed price design and build contract and a deadline for completion.
Check they’ve done their homework
Your property developer should be able to show you research and evidence to prove that their project is worth investing in.
That means (at the least) the results of a RICS survey, a list of recent ‘sold’ prices in the area, and prices per square foot achieved on similar properties.
Ideally, they’ll also provide feedback from agents in the area, information on market liquidity, and any economic forecasts.
If they don’t give this information voluntarily, ask for it. If they can’t give it to you when you ask, that should raise alarm bells.
Ask for a payment timeline
It’s vital to understand where you will be paid out in order of priority. Debt investment always ranks above equity investment and the lower down the order you are, the greater the risk.
Although potentially the rewards may be greater for equity investors (you may make 20% if everything goes well), conversely you may to lose your entire investment if things don’t turn out as planned.
Ask how your money is being protected
All investments incur a certain amount of risk. But even so, your property developer should be able to explain how they will protect your money should something go wrong.
As a debt investor you should be protected by a legal charge and preferably a first legal charge, which provides the best level of security.
Some platforms will go above and beyond this by securing all invested money against the land and property using a legal charge, so it’s worth asking for full details.
As an equity investor your protection is very limited, and should the development make a loss or have the bank step in to take over the development you risk losing your entire investment.
Make sure they have secured planning permission
Securing planning permission is never that easy, and yet many property developers assume they’re going to get it.
Appeals from locals are common and can happen before and after permission is granted, so if you want to reduce your risk, it’s important to make sure that the process is completed (which means no appeals outstanding) before you part with your money.
Assess the development location
Make sure to consider a variety of market conditions and average price forecasts.
For example, property prices in the North West are experiencing steady growth and are forecast to continue growing over the next five years, whilst London and the South East are experiencing a correction in prices.
The government has certainly helped with its ‘Northern Powerhouse’ campaign, but there’s also the plain fact that people want somewhere vibrant to live where they can afford and where they can get a job – and that’s precisely what the North West offers.
Manchester, for example, is home to MediaCityUK, which currently hosts the BBC, ITV and Ericsson – and will see major office openings from Sky and Google in 2019.
Where there are good jobs there are people, which in turn increases demand for property. So, it makes sense to not be like many investors in the South East who remain London-centric in their outlook. There are more appealing opportunities elsewhere.
As with any investment, if you want to make it worthwhile, you need to ask the right questions and look for the right platform that offers the right opportunities.
When done correctly, crowdfunded property development projects can make up a lucrative part of your portfolio.
*Frazer Fearnhead is CEO of The House Crowd