Seven myths and one truth about Property Crowdfunding

Demystifying Property Crowdfunding, all you need to know to start investing

Unless you have recently inherited a large sum of money, getting onto the property ladder can feel like an impossible dream.

As a result, Property Crowdfunding has proved to be a popular and potentially lucrative way of investing. This is all without mentioning the fact that it is a great way of contributing to much needed housing to be built in the UK.

However, despite this, some are still sceptical about Property Crowdfunding, citing the fact that you're tied in to investments, the lack of control you may have over the projects and the illiquidity of the asset.

Although risk is clearly an important, personal consideration and different investors will be attracted to different investments according to their personal preferences and financial situation, some of the criticism is still unfair.

So, what are the biggest misunderstandings around Property Crowdfunding that can be debunked? Or, looking at it another way, what's the definitive truth that gets proven again and again?

Seven myths about Property Crowdfunding

1. It's too new to be reliable

   Crowdfunding as we know it today could be traced back to war bonds launched in the 1730s while other forms of crowdfunding have been around for centuries.

   Composers Wolfgang Amadeus Mozart and Frédéric Chopin often received financial aid in return for musical manuscripts and public dedications. What's more, the Statue of Liberty was America's first crowdfunding project without intending to be, with newspaper pleas published in attempt to fund the statue's assembly.

   However, although Property Crowdfunding itself is still nascent, it seems to be gaining more and more momentum each year, now forming a significant segment of Alternative Finance. It has grown consistently over the last decade, and according to the Cambridge Centre for Alternative Finance's 5th UK Industry Report, it grew by a further 200% to £211 million by the end of 2017. It is now a heavyweight within the broader Crowdfunding market and continues to grow.

2. "It can be frivolous and is used simply to fund people's hobbies"

   Crowdfunding has genuinely funded all sorts of projects. It can make for a crucial source of funds when all other avenues have closed and innovative ideas are in danger of being extinguished.

   Labelling crowdfunding as frivolous is unfair however, and although it has been used for imaginative projects such as the Exploding Kittens card game, or even for personal reasons like the man who crowdfunded 13 first dates to find his true love, it has allowed more honourable projects to be completed too.

   The Oculus Virtual Reality Headset which sourced its funds using crowdfunding, was bought by Facebook in 2014 for $2 billion. What's more, Bragi crowdfunded $3.4 million for wireless headphones and SkyBell raised $600,000 in just 30 days for the video doorbell.

   Closer to home, craft beer brand BrewDog raised £41 million from 50,000 shareholders over eight years, before landing £213 million venture capital funding on a £1 billion valuation.

3. "It's under-regulated"

   Property Crowdfunding is rigorously policed. Firstly, UK platforms are covered by national law. Secondly, the promotion of certain types of crowdfunding investments falls under the regulatory remit of the Financial Conduct Authority (FCA).

   The FCA is mandated to protect consumers and uphold the integrity of the financial services industry. All Property Crowdfunding platforms which are operated by a regulated firm, or are the appointed representative of a regulated firm, must announce on their websites that they are "authorised and regulated by the FCA" or that they are the appointed representative of an authorised and regulated firm.

   This is intended to aid in the protection of consumers from fraud and scamming as the FCA can ban financial products for up to a year, and exercise its power to instruct firms to retract or modify promotions found to be misleading.

4. "Your cash is trapped for long periods of time"

   Liquidity can be important to investors. Who knows when you'll need cash at short notice?

   Although different Property Crowdfunding projects on various platforms offer different terms and can range from 6 months to 24 months (or longer), it still might not be for you if you think you might need your funds within a year of an investment ending.

   Property Crowdfunding really is a long-term investment and it's the illiquidity of property that delivers a certain level of protection. For example, when you eventually save enough for your home, you wouldn't consider selling it having just bought it – it's an investment for the long term because of the security it brings and the fact that the asset value should increase with time.

   It is a good idea to attempt to find out what proportion of returns are actually paid out by the platforms on time, or whether capital has been tied up for a significant period.

   By reading online comments about a platform or by going on forums, you can generally form a sound opinion of individual crowdfunding platforms judging by the frustrations of its clients.

5. "Risk is high"

   All investments involve an element of risk. However, it is possible to mitigate it slightly. The first is to invest in projects with an abundance of reliable market data and conduct thorough personal due diligence.

   Ask yourself what you want to achieve by investing in property, carry out thorough research on different platforms to find which one suits you, and attempt to relate to the local property market where your chosen project is situated.

   If, for example, there are a number of four bedroom new-builds with a very high estimated market valuation, and after researching the local area, your studies show that it is located in an overwhelmingly student area, it is probably not a wise investment.

   What's more, diversification is vital to mitigating risk. Investing via a platform, such as CrowdLords, offers a simple way to spread your capital over numerous investments, as one part of your larger investment portfolio.

6. There's a lack of control

   Some potential investors may be discouraged by the lack of control over how the development projects are managed.

   For example, if you do choose to crowdfund a rental property but then don't have any say in who the tenants are, how much the rent will be, or how the property is to be subsequently managed, you may be discouraged.

   But this the underlying principle of Property Crowdfunding. Platforms like CrowdLords specialise in connecting people who have the expertise, the experience and the time to build developments or run rental properties with others who may lack either the experience, the expertise or the time, but who crucially have the money to invest.

7. It's too expensive to be inclusive

   Although having plenty of capital to invest certainly helps, sometimes the opposite is true too. One of the best things about Property Crowdfunding is that it provides an affordable way into the property market. Though minimum investments vary from platform to platform, you can usually invest in property from as little as £250. It's also open to inexperienced investors, as well as sophisticated and high-net-worth investors.

   Whether you're a young professional trying to climb the property ladder, a parent saving for their child's future or a millionaire looking to diversify an existing portfolio, Property Crowdfunding could have something to offer you.

   As mentioned before however, if you're totally new to the world of investing, it is always worth doing some research into how Property Crowdfunding works. And remember, conducting your own due diligence and understanding the risks is vital.

An important truth: "The crowd is always wise"

Crowds are often wiser than individuals. The author James Surowiecki explored the phenomenon in his catchily-named 2004 book "The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations".

He begins with the story of an ox at a country fayre and how the passers-by must guess the weight of the ox for a prize. You've guessed it, although no single guess was correct, the average of all guesses was exactly right.

The wisdom of the "crowd principle" holds true in other contexts in finance too, noticeably in investing.

For example, Surowiecki goes on to write about the following factors that optimise the crowd's judgement when making financial decisions;

• Cognition

  Thinking and information processing, such as market judgment, which he argues can be much faster and more reliable in a crowd.

• Coordination

  Coordination of behaviour including optimising potential for the overall benefit of everybody in the crowd.

• Cooperation

  How groups of people can form networks of trust without a central system controlling their behaviour or directly enforcing their compliance.

Today, Property Crowdfunding is quickly becoming a mainstream and globally popular form of investing.

It has been labelled a "potential silver bullet" for the UK housing crisis and along with shares, bonds, and commodities, Property Crowdfunding can now be considered a proven part of a well-balanced portfolio.

Property Crowdfunding projects can be amazing opportunities, but the higher the rewards, generally, the higher the risk. Educate yourself, speak to the team at your chosen Property Crowdfunding company, attend events, learn about historical performance, and then decide for yourself whether these myths have any merit.