Investing in Developments - Understanding the risks and the rewards
For people looking for short term investments with potentially high returns, taking an equity stake in a new build development or conversion can be a good option, as long as you understand and consider the risks.
20 Years ago the SME sector supplied this country with about 40% of the new homes. In 2013 that was down to 25%. The main challenge the smaller developers face, having secured a property or a plot, is how to fund it. Being small businesses they often lack the capital required to secure Development Finance from the banks.
For many years, the only solution has been Joint Ventures with High Net Worth Individuals who, in return for providing the equity, take 50%-60% of the profits.
CrowdLords enables those Developers to convert those Joint Ventures into CrowdVentures, reducing the cost of capital and opening up the opportunity to invest to a much wider group of potential investors.
So what are the risks?
As with all property investments there are potential risks, and the complexity of developments means that there are more things that could go wrong. This is reflected in the projected returns, but it is important that you understand the risks before considering investing. These might include:
- Planning risk – If full planning approval has not yet been granted then this could mean that the development might not go ahead and it might be difficult to sell the plot or the existing property for the price paid
- Contractual risk – Developments usually involves the use of a main contractor and multiple sub-contractors and each of them represent a potential risk
- Market risk – Developments are usually budgeted on the current market values. If the market falls during the construction phase it could be that the units have to be sold for a lower than planned amount
- Time risk – It is possible, once the work has been started, that unexpected issues are uncovered delaying the development. Or it might simply be that the end product takes longer to sell than was expected. Time delays will not only diminish your expected annualized return, but, because of the use of debt to fund the development, the extra finance costs can easily eat into the profit
- Financial risk – Most development investments make use of finance provided by a lender that has a First Charge over the development. If things go wrong, they have the right to take over the project and its assets
So what's in it for you?
With so many potential risks you might wonder why anyone would invest. The reality is that these are only potential risks and it is not uncommon for things to go smoothly and for the project to end up being even more profitable than expected.
Indeed, there are some very strong reasons to consider investing in developments on CrowdLords:
- Short investment periods - usually between 12 months and 24 months meaning that you not only get your returns sooner, but you can reinvest the returns to compound your gains
- Substantial projected returns - typically between 18% and 25%, often with a minimum preferred return that is paid before the developer takes any profits
- Potential Market Growth - The potential to also share in any market growth during the construction phase. It’s not unusual for a 5% increase in market values to increase profits by 20% or more.
- Low entry point – You can often invest from as little as £1,000 which means that it’s easier to spread your risks across a number of developments
- Full Transparency - The ability to make your own assessment of the Developer, the location and the project before deciding to invest. We are also happy for you to contact the Developers directly so that you can hear the facts first hand
- IFISAs change what the word "savings" means in the UK
- Frequently Asked Questions: What is an IFISA?
- Meet the Developer
- IFISA at the heart of UK property lending product change
- Crowdfunding and P2P Lending - Vive La Différence!
- Is this the year alternative finance goes mainstream?
- Crowdfunding, a game changer
- Crowdfunding marks the fall
- How do you choose an investment
- The Common Questions investors are Asking About the IFISA
- Investing in Developments - Understanding the risks and the rewards
- Why invest in Birmingham
- How do you decide which investment is best for you?
- The differences between Interim Equity and Full Equity
- Top 5 Myths and Truths about Property Crowdfunding
- A Closer Look at Due Diligence in Property Crowdfunding
- Introduction to ISAs
- Understanding the Capital Stack
- UK Leads the Way in Alternative Finance
- Co-investing in a central Birmingham residential development