Crowdfunding new property developments: 10 tips for would-be investors

Frazer Fearnhead, CEO and founder, The House Crowd

Despite attempts by government to alleviate the UK’s current housing crisis, we cannot rely exclusively on public money to build new houses and boost supply. The government’s recent £2bn investment in ‘social and affordable housing’ will add some relief but to achieve real results, but we need to maximise private investment too.

This can be done by raising awareness among retail investors. It is now easier than ever before to help fund new housing developments – and benefit financially in the process. This is one of the most appealing, yet underrated features of property investment; addressing a social need while simultaneously earning a return on your investment. Older generations, for example, can invest in peer to peer development loans to crowdfund the building of new houses for up and coming millennials. In this way, they can build their nest eggs and help a new generation get a foothold on the housing ladder at the same time.

Money needed to build much-needed housing developments can be raised quickly. Unlike government investments, there is less red-tape and bureaucracy to wade through, enabling fast action and fast results. That said, it’s important that private investments in property developments are made through secure and reliable platforms.

Here are 10 important points that investors need to consider when getting involved in peer to peer property development lending.

  1. Know who controls the property development

    Frazer Fearnhead, CEO and Founder, The House Crowd

 

Some peer to peer platforms raise money for a variety of third-party property developers. There are many things that can go wrong with developing, but many of the risks can be mitigated. It’s important that you are confident that the platform has undertaken thorough due diligence on the developer and that they and they control the drawdowns carefully.

Direct accountability and oversight help ensure that your money is looked after ethically and used responsibly.

 

  1. Make sure your investment is protected by a legal charge

 

Traditional property development typically involves a bank that has first charge over all assets. This is a risky finance deal that can leave equity investors highly vulnerable should something go amiss.

The benefit of debt based property crowdfunding platforms is that investors are protected by a legal charge. This means that the properties cannot be sold without you being repaid. Minimise your risk by choosing a property development deal in which investors are always paid out first.

 

  1. Look for additional layers of protection

 

Even the most experienced investors can run into trouble. All investments, no matter how well researched and triple-checked, present some level of risk. However, investing with a property crowdfunding platform that is able to cross-collateralise provides an extra layer of protection. This means that if your capital is ever at risk, the platform will forecast a provision fund to cover any losses, drawing revenue from its other developments.

 

  1. Make sure your developer conducts due diligence and research

 

There are many developers out there who rely on gut instinct to determine the feasibility of a project. Avoid these types at all costs. Instead, look for the developers that do their due diligence and investigate historic sale prices, market liquidity, economic forecasts and demographics – at the very least. Of course, all of this won’t ensure absolute success, but it does indicate a developer that will do everything they can to get as close to it as possible.

  1. Check that the development has secured planning permission

 

Securing planning permission can be problematic. Most people will agree that we need more houses, but nobody wants to live next-door to a building site. Councils can drag their feet for months, even years – and should they grant permission, often impose conditions that derail the whole project. To avoid this frustrating and complex song and dance, only invest in developments that have full planning permission in place.

 

  1. Understand how contractors are used and their deadlines

 

When investing via a crowdfunding property platform, you shouldn’t have to deal with builders directly – but nonetheless, it helps to know how your developer of choice manages them. For development companies, it’s worth paying a premium for reputable contractors with a solid balance sheet who commit to a set fee and fixed deadlines.

Make sure the developer you invest with has the people and processes in place to manage a fixed price design and build contract. This will significantly mitigate the risk of a project going over budget or over schedule.

 

  1. Make sure the lending platform has appointed an experienced fund monitor

 

In addition to builders, building site managers and contract agents need to be chosen carefully. The platform’s fund monitor should conduct its own independent feasibility study and cost breakdown.

Regular on-site supervision by the fund monitor is essential to ensure a high standard of work, that drawdowns never exceed the current site valuation, and that all health and safety measures are adhered to.

  1. Be wary of equity versusfixed rate investing

 

While some people may veer towards equity-based property investments, the risk is considerably greater than fixed rate investing, as investors will only get paid after any loans or other debt-based investments are settled.

Equity returns tend to be more variable which means you can make less or more than you were expecting. Unless you are willing to assume more risk, it makes more sense to opt for consistent and predictable returns with a fixed interest rate.

 

  1. Understand how your capital will be repaid

 

As the investor, your money should be protected at all times. In other words, as properties are sold and funds are released, all capital needs to be repaid to investors in order of receipt followed by interest.

Only when investors have been paid does the developer receive the profits. This is the most equitable approach and one you should look for when investing.

 

  1. Look outside London

 

The capital city is home to some of the most expensive properties in the country. Don’t get stuck with a development company that only deals in London-based property developments. There are some very lucrative property deals in the North West, for example, that with access to the right networks, present rich investment opportunities.

The housing crisis is a nationwide issue that requires a combination of government and private investment initiatives. As with any challenge, an innovative approach can yield untapped opportunities and, in this case, deliver results that benefit individual retail investors as well as wider society.

 

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