THE POWER OF THE CROWD
What the (Crowd)Funding Revolution Means for YOU!
You might look at this article and think “Crowdfunding? Big deal! Kind of interesting, but how is it relevant to me?”
In short, it’s massively relevant.
There is revolution going on in the world of property finance. The credit crunch eight years ago signalled a game-change for investors and developers as they struggled to get funding from traditional sources. At YPN, we know many who were victims of banks hastily withdrawing funds for projects that were mid-build. While some continued to battle with high street lenders, the enterprising few looked elsewhere.
Crowdfunding for business had already begun to emerge, but these platforms did not lend on bricks and mortar. So a handful of forward-thinking property entrepreneurs took the model and adapted it for this asset class. Now, a few years later, we have CrowdProperty, The House Crowd, Property Moose, The Property Crowd, Property Partner, Crowd2Let and plenty of others.
The models differ – some offer equity shares in rental properties, others offer a decent rate of return for lending on “in and out” development projects. But one thing is for sure, it has opened up a new world of funding.
As a developer, crowdfunding enables access to finance you would never be able to reach. It can also reduce cash flow problems as some platforms will forward-fund projects.
As an investor, crowdfunding can provide a solid return on investment (ROI) at bank-busting rates without the aggravation of having to go out and source and manage your own properties. Where else can you get 8%-10% at the moment? Try asking for that at your local branch of Lloyds or NatWest ...
With George Osborne’s Clause 24 assault on buy-to-let (BTL) mortgage borrowers, owning a share in an unencumbered property makes far more sense from a tax perspective than being highly leveraged.
Over the course of this feature, we will consider the advantages, disadvantages, formats and models of different types of peer-to-peer lending for lenders, borrowers and the platform owners themselves, to give you a truly rounded picture of how crowdfunding works for property deals, and how YOU can benefit!
CrowdProperty – the Platform
CrowdProperty founder and CEO Simon Zutshi is a familiar face in the pages of YPN; co-founders Mike Bristow and Andrew Hall are also well-known figures in the property investment world. The idea behind CrowdProperty is simple: to bring together property developers and professionals unable to get the money they need to make profitable projects happen, with people who do not get as much interest as they would like from their investments. The mission is made clear on the website: “Give people a potentially better return on their money by allowing them to directly lend it to property developers and professionals looking for funding. That’s why CrowdProperty exists.”
For developers and active investors, CrowdProperty has become one of the best known property crowdfunding platforms in a short time. Founder Simon Zutshi has taken some time to explain how the platform came into existence and how the concept works.
YPN: How long has CrowdProperty been up and running?
Simon: The first deal (The Flying Dutchman pub conversion, see Peter and Dick Dabner’s Case Study #1) went live on the platform at the end of August 2014. Since then we have funded fifteen deals worth over £5m.
YPN: How does the CrowdProperty model differ from other crowdfunding models?
Simon: We are a property specialist peer-to-peer lending platform where people make loans to developers for a return of 8% pa, with the security of a first charge held by CrowdProperty on behalf of all the lenders. Unlike other platforms, there is no share of equity but the lender gets all their money and interest back before the borrower makes a single penny.
YPN: What legislation / regulation did you need to go through?
Simon: All peer-to-peer lending platforms need to be regulated and authorised by the Financial Conduct Authority (FCA) to ensure customers are treated fairly, and to protect lenders as much as possible. We have interim permission and are in the process of getting full permission.
YPN: What types of deals do you fund and what are your criteria?
Simon: It has to be a good project with ideally a 25% profit on costs. As our expertise and experience is in property, we are able to assess a deal much quicker than a bank. We will lend on new build, title split, house to HMO conversion, commercial to residential – in fact, any project where the borrower adds value to the site so they can repay the lenders by either refinancing or selling the asset.
YPN: What do you look for in the people that you lend to, ie the borrowers?
Simon: The borrower needs to be experienced with a good track record and/or have an experienced team around them. We can tell very quickly if a borrower knows what they are talking about.
YPN: What due diligence process do you go through on a potential deal?
Simon: It must meet our criteria before we take a closer look at it. There is a lot involved in the due diligence process and we also get a third party valuation from a RICS surveyor on the value before and after works.
YPN: What happens if a deal goes wrong?
Simon: We have not had any go wrong yet because of our due diligence process but, as we all know, things do go wrong.
First, we would always work with the developer to help them resolve any issues where possible.
Second, we have an arrangement with a bridging company who is prepared to step in and take out our loan so that we could repay money and interest to the lenders.
Finally, in the worst case, we could repossess the property and manage the project ourselves – which we have the skill, contacts and expertise to do – to either sell or rent it until such time we can get money back to the lenders.
YPN: Why would a developer use CrowdProperty as opposed to more traditional forms of development finance?
Simon: We understand property, so the developer has someone who they can actually talk to about their projects. That means we can spot a great deal and will therefore not need as much information as a bank or bridging company. Also, we can move as quickly as a bridging company – so much quicker than a bank – and for the right deal, we might lend more than other lenders, which would minimise the amount the developer has to put in.
YPN: What forms of protection or guarantees are offered to lenders?
Simon: We hold a first charge on the property project on behalf of all the lenders. In addition, as loans are only six to eighteen months long, there is not much exposure to changes in the market.
YPN: Who are the lenders? Is there a typical “type” of person?
Simon: Anyone who has at least £500 and wants a better return on their money! People can lend cash, money from their business or even from their pension in certain cases, but they must have a UK address bank and bank account.
YPN: What’s next for CrowdProperty?
Simon: We aim to raise £15m of funding this year. At the moment we only lend on development deals but when we have enough lenders we want to offer HMO mortgages to investors, something we believe will be very popular.
Now, they share their experiences of crowdfunding from the perspective of a borrower, and explain the processes involved in using this type of finance for a development project. As they are supremely adept at raising funds through bank lending, development finance, private investors and joint venture (JV) partners (as well as using their own personal funds), we were particularly interested to find out what the appeal was for them in using crowdfunding for not just one project, but two.
Dick: In today’s market, you have to have as many strings to your bow as you can. Crowdfunding is part of a much bigger picture and I believe developers and refurbishers should consider it as one of a range of funding solutions.
In some ways you can’t separate it from other types of finance, because today’s crowdfunder who puts in a small amount, maybe £500, might become tomorrow’s JV partner. That has happened to us: some who participated in crowdfunding our projects went on to invest with us independently and learn from us by observing the projects, so we don’t really make a distinction. It’s a way for people to earn money from property and we saw early on that crowdfunding, and CrowdProperty in particular, would be another opportunity to source funds.
Peter: When we started back in 2002/3, friends and family helped out with funding alongside buy-to-let (BTL) mortgages, high street banks and commercial finance. Further down the line we involved other investors on a loan or JV basis, and that private investment enabled us to continue to expand during the credit crunch period, which affected us for longer than we originally thought it would. So private finance became a key part of our business.
Peer-to-peer lending has emerged over the last couple of years, but most of the more established platforms don’t lend to property developers – in fact they specifically exclude property, probably because the operators are more familiar with the business arena. Property lending is quite specific and requires certain underwriting capacity within the team, together with an understanding of property and of the types of projects that developers take on. When property crowdfunding emerged we saw it as a significant and important step for the industry. We wanted to show our support for it, and also for Simon Zutshi in establishing it as we already knew him. The more strings we have to our bow, the better our chances for future-proofing the business and remaining flexible enough to change with different economic climates and challenges. Whether we fund a project through direct private investment or crowdfunding doesn’t really matter as long as the figures work and we can raise the money.
There is another advantage too. For both of our projects, there were over 30 individual investors. Having already worked with private individuals, we know what it takes to manage 30 different conversations and payments and keep everyone up to date, and the crowdfunding platform takes care of all of that. In addition, they are regulated and so can advertise, which we cannot when we are raising funds from private individuals.
As the borrower, you don’t know who is lending, but as Dick mentioned earlier, some went on to invest with us directly – we only knew when they told us they had previously crowdfunded our projects. People can start by putting up smaller amounts of money instead of having to commit larger sums, which helps our exposure by giving us access to a marketplace and investors we may never otherwise meet who want to get to know how we work before investing with us directly.
We see crowdfunding as being a very important part of the future and things are already starting to change in property development as a result. Having a successful track record through crowdfunding becomes a big help when talking to other lenders, as it reinforces your background for borrowing and repaying.
How CrowdProperty works
Dick: We didn’t have a full understanding of what the process would be for the first project (see Case Study #1) because it was so new. However, perhaps the best comparison is commercial funding, because the business behind a peer-to-peer lending platform and the checks they carry out are very similar to the way banks finance a development. In a nutshell...
• We get a valuation done.
• We put forward details of the development, our figures, and paperwork conveying our experience and successful projects completed in the past.
• CrowdProperty undertake a review, do the due diligence and research end values, and we answer any questions as they come up.
• Terms are agreed (we know the headline terms in advance).
• The project goes through to the underwriting stage, and will be subject to valuation, the underwriters, and the solicitors’ legal paperwork.
One of CrowdProperty’s huge strengths is that they are property people whereas banks lend in many different sectors. Their team is experienced in this sector and in development, which was useful when we hit a challenge on the end values. We were able to discuss the issue with them and in the end, we actually exceeded the projections. Generally speaking, we are cautious when forecasting and were able to convey that and although we compromised on the loan amount, we still got enough to do the build. This is an important point because if a commercial funder differs with your opinion, sometimes there is no negotiation; with CrowdProperty, you can pick the phone up and talk to the person making the decision.
Peter: Dealing with people from a property background, compared with banks or commercial lenders, is quite different as the latter are one step removed. Because CrowdProperty is a smaller business, the people doing the due diligence are talking both to us and to the crowd, so there are fewer steps involved in replying to any questions raised.
We’ve also found in the past that banks can have an institutional caution against lending beyond a certain point, particularly in times of volatility. If CrowdProperty were to take a similar view, we’d at least be able to have a discussion with the person who makes the ultimate decision. That said, we’ve had better service from the banks over the past eighteen months than when they were particularly cautious and concerned about development.
Crowdfunding platform criteria
Dick: Although they are property people, CrowdProperty still undertake intense due diligence on borrowers. Despite being known to Simon and the pin and mastermind communities that formed the basis for the crowd, we still had to prove and demonstrate our experience. They were very thorough, similar to banks checking you out as a borrower, or private investors doing due diligence before lending or investing a large sum of money with you. They’re not only verifying whether the deal stacks, they’re also investigating you to see whether you can deliver under nearly all circumstances. No stone was left unturned. The platform quite rightly wants to make sure that investors’ money is as safe as it can be.
Peter: That doesn’t mean to say someone with less experience wouldn’t be able to borrow, but the due diligence would be comprehensive. The borrower’s training and experience, such as it is, would be considered more carefully. If you lack a track record, it might be worth bringing in someone with more experience, such as a project manager, to plug the gaps. A project is very much about the strength of the team.
Project management is the biggest part of our business. We have a management team and one person with overall responsibility for delivery who meets with individual managers regularly on site. Depending on the size of the job, a full-time project manager should be able to deal with three or four schemes concurrently, perhaps less if it’s a bigger build or if it stretches them beyond their experience to date. We have a comprehensive structure of weekly meetings with directors, managers, investors, architects and so on, to keep on top of developments, discuss challenges and check where we are with all the sites.
Any lender will go into the background of the company or individual borrowing money, and needs to have confidence that the borrower can bring this project to fruition without getting distracted on to others or overwhelmed by the scale, which can be a challenge for developers. If you go, for example, straight from a couple of 2-bed flat refurbishments to building ten luxury 5-bed houses, that would flag alarm bells with any lender. They like to see linear progression, and that you are extending yourself within the appropriate context of your experience and understand the risks. That’s part of their underwriting process.
Having a third party lender who understands the sector is a very good final check for your deal. If you’ve done your homework, been careful on your figures, worked out a contingency, have a plan B, and have some experience on board, you should be able to get a loan. But it’s reassuring to hear from somebody else with a professional background who sees a lot of cases that it passes the test.
Crunching the numbers
With a good understanding of property, crowdfunding in this sector potentially allows you to raise more money as some commercial lenders have strict rules about only advancing a certain percentage of the purchase price. For example, if you pay £100,000 for a site then enhance the value by a further £100,000 through gaining planning permission, some will still only lend against the original purchase price. The crowdfunding platforms (and a few commercial lenders) will consider that and may, subject to a RICS surveyor’s confirmation of values, be prepared to consider the added value and offer more.
With regard to the cost of borrowing, we have found crowdfunding to be similar to bridging. We paid a rate of 10% pa, or 0.83% pm, for the money raised. For shorter projects of six months or less though, bridging would probably work out cheaper because CrowdProperty has a fixed arrangement fee of 5%. For periods longer than six months, then crowdfunding would likely work out cheaper. There is no exit fee.
All the fees are clear from the outset, but the other thing that makes a difference is that CrowdProperty pay their own legal fees. With bridging even though the interest rate may be lower, legal fees can rack up and there may also be an exit fee. You have to look carefully at the overall costs for comparison.
Dick: Crowdfunding doesn’t just have to be about big deals – small ones are just as important as long as they tick the boxes. Each is calculated on its own merits and if the platform feels they have underwritten the risks in the right way, smaller deals provide a balance to the bigger ones. In our own business, we have bread-and-butter smaller projects that require finance all the time, as well as the big ones. We don’t want to get stuck in any one market because circumstances can change very quickly, and that’s one of the reasons why we see crowdfunding as being part of our overall access to funding across the board.
Landline: 01892 288123
CASE STUDY 1
The Flying Dutchman
Loan amount: £360,000
Dick: The first project we funded through CrowdProperty was a conversion of the upper storeys of a pub we purchased at auction. The ground floor comprised the commercial element of the property, above that was a function room and a manager’s flat. We applied for planning permission to convert the building into several flats, which took some time, but we were successful in obtaining permission for four residential units above the ground floor.
We approached CrowdProperty after getting planning permission. That lowered the risk of the project and we applied for a loan to help with the conversion costs.
Raising the money took longer than expected, but this was a new concept and we were breaking new ground. Though a few people had some prior experience of non-property crowdfunding for business, the money was slow to come in. When the loan was about two-thirds committed, however, we spoke at a couple of events in London and Birmingham; after that the funding accelerated.
We had decided to make a start on the build, something we often do to get developments under way by using our own funds, and by the time the funding came through we had sold one of the flats off-plan so didn’t need as much as we had applied for.
Since this project, CrowdProperty has moved on significantly as people have a better understanding of the concept and confidence that it works. They now fulfil loans about four weeks after going live. There are still legal and business processes to follow, but that’s much faster and more functional from a borrower’s point of view.
CASE STUDY 2
Loan amount: £310,000
Filling the loan requirement for our second development was faster and easier. This project dovetailed with the first, coming in at the latter end as it was part of the same site. We had applied for planning permission to build behind the Case Study #1 conversion and though it took several goes, we had a good indication we would get permission for two 2-bedroom semi-detached houses.
We approached CrowdProperty at this point to apply for a loan for the build cost. It made sense as the site was associated with the first project and we were shortly due to repay the crowd, so we anticipated that would help in filling up the funding requirement for this as fast as possible.
Once again we went ahead and started the build after getting planning permission instead of waiting around. The crowdfunding came in much faster this time: we had an advance of £90,000, with a further £220,000 paid in stages, which had been pre-agreed. This process was similar to that of a commercial lender, making it more secure from the crowd’s point of view as CrowdProperty was “policing” what we did before we were allowed to draw down the funds.
The House Crowd was founded by Frazer Fearnhead and Suhail Nawaz in 2011 and started trading in March 2012. One of the first property crowdfunding platforms in the world, they have since successfully funded close to 200 projects, with several more in the pipeline.
Frazer (Team Captain) and Suhail (Chief House Hunter) have developed a fun, light-hearted brand but as it says on their web site “beneath the frivolity beats the heart of a company that works exceptionally hard to find excellent property investments and provide investors with a highly professional service.”
Frazer’s grandfather started an estate agency and his father was a property investor, so property runs in his family. Though he himself started out as a music lawyer, he realised property would be the best way forward after doing some refurbs and flips while living in London in the mid-90s. “I was making more money from a few hours of my time doing that than I was working as a solicitor, so I quit my job in 2000. I continued to invest and started to help other people invest a few years later.” That turned into a property investment consultancy that he sold to a PLC in 2007.
After that, he took a break from property until he began to spot post-credit-crunch opportunities and that, despite bottom of the market prices, people were finding it difficult to get mortgages and finance. “That’s really when I came up with the idea for The House Crowd – cutting out the banks, and letting people join forces to put up the money together and share in the profits proportionately.”
How do you like the idea of true hands-off property investment with no hassle from tenants, no responsibility for maintenance and yet still get a decent return? Sound good? Well, that’s what The House Crowd can offer you.
The House Crowd model means you have a share in the ownership of a property rather owning it yourself, providing a way to diversify by investing in multiple properties rather than piling all your eggs (or bricks) into one basket. “If people have got larger amounts of capital to invest,” says Frazer, “they spread it over different projects. It mitigates their risk. If they wanted to stick £200,000 in one property, frankly they would be better off buying it themselves. There’s no point in buying an entire property through us – but a £20,000 share in ten properties makes much more sense.”
The difference between this and other property crowdfunding models is that it enables investors to stay in the investment for the longer term and enjoy a rental return as well as capital growth potential. But as with other crowdfunding platforms, you don’t need huge sums of money to start. “Essentially it allows people with smaller amounts of capital to access property investments that otherwise wouldn’t be available to them. This sector has traditionally been the reserve of people with enough money to put down for deposits, with good enough credit ratings to get mortgages, and who want to build a portfolio.”
While creative finance options are available for people with little capital who want to (or are prepared to) be active in property, these strategies need education, dedication and a time commitment. Furthermore Frazer’s view is that creative techniques carry a risk of over-leveraging, resulting in a portfolio that has to be subsidised each month. Regardless of your view, it is not for every man or woman on the street, so The House Crowd aims to help these people by taking the pain out of investing. Their team sources the properties, does the due diligence, then offers investors returns that are as predictable and consistent as possible.
Introducing such a new concept four years ago brought a unique set of challenges. “It took us six months to find a firm of solicitors who could construct the legal paperwork that worked within the very narrow exemptions of the current regulations.” The Financial Conduct Authority (FCA) has since allowed crowdfunding but decreed it would have to be regulated. That involved the FCA carrying out high level due diligence into everyone in the company, the business, its processes, contingency plans and the returns being delivered to investors. Though he might not have chosen at the beginning to establish a regulated business, Frazer readily acknowledges that it’s a necessary step that offers a level of protection to investors. “I’ve changed my mind about it over the last few years – although dealing with all the regulation drives me mad, I think it’s a good thing for the industry.”
Most property crowdfunding models focus on short-term “in and out” deals where people provide finance for a development project over a specific period of time and funds are paid back on sale of the asset. While The House Crowd has a greater focus on equity investment with people holding longer term shares in a property, they have moved towards the development model more recently, and also now provide secured lending. In short, they encourage diversification and offer a mix of debt and equity investments. These different aspects of the business have different regulation frameworks, making the compliance process rather onerous – and expensive. “We have to apply for different permissions for each aspect of the business. Crowdfunding permission allows us to arrange equity deals, and peer-to-peer lending permission applies to the other side of the business. It’s not easy and we’ve probably spent well over £50,000 in legal and compliance fees.”
All businesses face the challenge of getting their product or service in front of enough people to make it worthwhile, but being still a relatively new concept, property crowdfunding involves educating as well as selling. While the crowdfunding sector has grown exponentially in recent years, it’s not yet mainstream so players in the field have to work extra hard to get their message across. Frazer’s answer to this was to develop colourful, cartoon-like branding with a vein of humour that enables them to stand out from traditional “blue and grey” corporate finance or property organisations. The company is active on social media, uses humour in advertising and has had good media exposure, using a combination of marketing methods to create a strong, easily identifiable brand that people can relate to and come to trust over time. Overcoming scepticism has been one of their major hurdles and investors frequently track them for a year or more before finally committing.
The process for individual lenders is relatively straightforward. After registering, individuals can look through available investments and choose either a longer term equity investment with a mixture of dividends and rental income, or a fixed return through peer-to-peer lending, which typically pays 9%-10%, occasionally more. Monies can be placed by transferring funds or via a debit card directly from the web site. You could in fact draw parallels with online share dealing, a process that has inspired Frazer in building this business.
Demographic reports suggest that a high proportion of their investors are based in London and the South East. Their backgrounds are very different though and at a recent investor event included financial advisors, accountants, ex-landlords who had got fed up with managing their own properties, a DJ, a tennis umpire, and teachers. “Some people invest modest amounts, using this as a better way to save than keeping money in the bank, while others, like bankers working in Switzerland, will suddenly stick in £200,000 out of the blue.”
Not everyone has the odd £200,000 sitting around, but a minimum investment amount of £500 opens up the property investing arena to vast numbers of people who wouldn’t otherwise be able to (or might not want to) get involved.
The type of properties that the company sources and offers as investments has changed as the model has involved. They started with traditional terraced houses at the lower end of the market but after experiencing tenant problems moved to larger 3- or 4-bedroom houses rented out as corporate lets, or apartment buildings with multiple units. “With investments like this, you’re able to deliver more predicable returns because if one flat is empty, at least you’ve still got income coming in from the others.
We’re moving much more towards doing our own bigger developments, either to sell or to rent out, and have moved away from the lower end of the market.”
Of the 190-200 projects they have funded, 165 have been retained. Each portfolio property is held within a special purpose vehicle (SPV) company and The House Crowd’s fees, usually around 5% of monies raised, are charged to that company rather than to the investor. There is no charge to the investor for secured lending; the company charges the borrower not the lender, so the lender receives the stated net percentage rate.
The House Crowd offers three basic products: fixed rental buy-to-let, where tenants have five year contracts and pay maintenance costs; business/development loans, secured against the borrower’s property (up to 75% LTV); and developments. “Developments are the most exciting area of the business for me. We have recently built six new townhouses in Manchester, are working on four luxury £1m apartments in Alderley Edge (see Case Study #1), and have two new build deals in the pipeline – one for 30 houses and the other for eighteen.”
With so many projects and so many people involved, the administration of handling payments to the right people at the right time could quickly amount to a logistical nightmare. It’s no surprise to learn that The House Crowd has a hefty finance department in place, supported by external accountants.
The other potential pitfall is maintenance and breakdowns. People in property know that things don’t always run smoothly. Boilers break down, roofs get damaged and so on. What happens in these situations? “We’ve moved away from the lower-priced terraced stock that was originally let out to LHA tenants in favour of projects where we can provide a more predictable return.” Damage in properties producing £500 pm eats into yields and dividends so as return in that sector proved inconsistent, they now only offer deals where they have a contract with a corporation, which produce gross yields of 9.5% and allow them to deliver much more consistent returns of 5.7%-6% to investors, net of all fees and corporate tax. Coupled with any capital appreciation, it can make for a very healthy return.
Despite the earlier comparison with share dealing, investments are not as easy to cash in as stocks and shares, which can be sold instantly. Any property holding means a slower exit process: while holdings can be sold, a sale cannot be guaranteed because there must be a corresponding buyer to be able to complete the transaction. “The next phase of our web site will be to create a system where people can buy and sell shares in existing properties but there is still no guarantee they will be able to sell them when they want.” The House Crowd does, however, set a minimum investment term, typically three years, to allow for a degree of exit planning. At that point, shareholders vote to sell or keep the property and the majority vote will determine the outcome.
Finding investment properties
With such strict criteria, how they source their properties is a natural question. At present, that falls mainly with the in-house team. “We have found it hard to find reliable third party sourcers who can deliver an investment product. We’ve also found that the further we go away from our knowledge base of Manchester, the more likely errors are to occur. That’s not to say we don’t work with third parties,but we have to do very thorough due diligence on the projects before they are accepted and promoted via the platform.” Frazer recognises though that ultimately, to expand the business, they will need to tap into other people’s expertise and find reliable third parties in other parts of the country.
The tax impact
Buying and holding investment property will require a higher degree of financial planning for the foreseeable future as taxation changes begin to take effect. Crowdfunding could therefore become a more attractive model for higher rate tax payers as leveraged rental portfolios become more expensive to operate. Having been in the position of needing to subsidise his portfolio in the past when he was young and inexperienced, Frazer is quick to dissuade anyone from getting caught in the high leverage trap. “It puts tremendous financial pressure on you and I went through some very difficult financial times as a result of following that strategy.” The strategy in question was buying, then refinancing the money back out to buy another, while waiting for capital values to increase. “Capital growth is completely speculative and as a company we focus purely on investments that pay yield and dividend and put cash in people’s pockets.”
With an eye to expansion, Frazer’s next challenge is to recruit some key people to help the company grow. They will be raising finance to do that in the autumn, then aiming to build the company as quickly as possible with a view to a partial flotation in a couple of years’ time.
Call: 0207 873 2350
Alderley Edge apartments
This started in May this year and has an estimated build period of fourteen months. A former disused building on the site has been demolished and the new development comprises four luxury apartments, each approximately 1,800 sq ft in size.
Purchase price: £1,400,000
Pre-planning application costs: £60,000
Estimated build cost: £1,000,000
Sales costs: £53,000
Finance and other costs: £93,000
Projected profit: £800,000
Investors are paid a flat rate of 10% pa on a fixed return basis, with interest being rolled up until the end of the period. Funds are repaid when the properties are sold.
Arthur Howlin has placed several investments with The House Crowd in a number of different projects. He tells us about his experiences of the crowdfunding model from the other side of the platform, and also explains why he chose this route rather than investing directly in property himself.
YPN: What’s your background and how did you come across The House Crowd?
Arthur: I retired four years ago and at that time bank interest rates had crashed to negligible levels. Anyone who is retired will tell you that income is of great Importance, and I had a reasonable amount of savings from which I wanted a decent income. I had done some crowdlending through platforms like Zopa and RateSetter, but wanted to diversify and eventually came across The House Crowd. I educated myself in what they were doing – I wouldn’t say I jumped in with both feet but made an initial investment back in 2014 to see how it went.
So far it has been pretty painless. It’s hands-off and I get a dividend payment once a year. I have placed several investments with them now and the dividends accumulate so it makes sense for me.
YPN: What due diligence did you do to check them out?
Arthur: That’s a good question and it was a concern. At first, all I saw was a web site inviting me to stump up some money so I did a few things. I checked them out with Companies House, checked Frazer really existed and did have a company, researched the properties they were putting forward on Google Maps and Rightmove and went on to do further investigations after placing the initial small investment, going to the Property Investor Show at ExCel where I met Frazer, which reassured me he existed and was running a real business. Subsequently, I listened into some of the webinars they were doing to educate the market. Nothing untoward came out of any of it, which gave me confidence to go a bit further.
YPN: Did you lend finance for development projects or take an equity stake over the longer term?
Arthur: The House Crowd operates investments by setting up a company – a special purpose vehicle – to own a single property, then sells shares in that company. I have bought shares in a number of these companies, so have an equity stake in the company that owns the property and also get a share of the rental income in the form of a dividend. The asset is sourced and managed by The House Crowd. If it has gone up in value when the property is sold in the fullness of time, I would also get a share of that increase.
YPN: Is there a fixed term on that investment?
Arthur: I’m more interested in the rental income so don’t have a time horizon by which they have to be sold. Having said that, most are marketed as five-year investments, after which a decision will need to be made by shareholders to sell or remain invested.
YPN: Could you sell your share if you wanted to?
Arthur: It’s not totally straightforward but they do facilitate buying and selling existing shares once per year. I have seen offers to buy shares that someone else wanted to sell and have done so once. I believe shares are sold at par.
YPN: Did you ever compare this process with doing the investing yourself?
Arthur: I had thought about it. I have one property that I let out via an agent so have some awareness of what’s involved. I’ve had a good experience but if all your eggs are in a small number of baskets and you have a problem like a void or repairs, you may not get the returns you were expecting, whereas if you spread it out in this way, that’s smoothed out over the properties you have invested in. Having done this with The House Crowd, I’m not inclined to do any more on my own – I’m retired and don’t want to spend my time looking after buildings and tenants. I want to spend my time enjoying myself!
YPN: Did you ever consider going to an IFA or wealth management company who would choose your investments for you rather than taking control and making your own decisions?
Arthur: I guess I’m uncomfortable with the level of fees advisors tend to charge. When I was younger I bought some unit trusts recommended by a financial advisor, but felt like I was paying his fees and not getting much extra. Over the last twenty years or so I’ve done my own thing more, and generally been happy with what I’ve achieved.
YPN: What advice would you give people who want to be hands-free investors through property crowdfunding, over and above doing thorough due diligence on the operators?
Arthur: Firstly, be aware that in the first year you won’t make great returns. Though it depends on the business model, buying a property, doing the renovations and renting it out can take a while. That could easily mean losing around six months’ rental income so you won’t make the headline returns in that first year.
Secondly, diversify. You’re far better off making four or five small investments than one or two larger ones because if there is a problem getting tenants, the rental income won’t come in at the level you expect.
See the case study below for details of one of the deals that Arthur has invested in.
Middle Hillgate, Stockport
A block comprising two retail units, four 2-bed apartments and six 1-bed apartments.
Purchase price: £630,000
Open market value: £1,000,000
Existing rental yield: 9.15%
Potential to increase rents to £500 pm for 1-bed flats and £600 pm for 2-bed flats.
Projected rental income: £73,000
Projected yield: 10.6%
Annualised return for investors: 22.7%
Total investment required: £769,000
Price per share: £1,000
Minimum investment: £1,000
Minimum term: 5 years
Lloyd Girardi and Andi Cooke have taken on more and more challenging projects over the past few years, some of which they have shared in the pages of YPN. They have used the crowdfunding platform Funding Circle to finance some of these developments and explain the appeal of this method over more traditional routes to finance.
Andi: I’ve been a builder for over ten years and used different types of funding over that time. Before going into the world of property investment, I went for traditional bank and development finance because that was all I knew. But that can be hard work – you get a facility agreed, and it’s usually funded retrospectively. You put in the first tranche yourself, then the bank advances the money to you after a surveyor has checked the work and you use that sum for the next phase, and so on.
What we’ve found through crowdfunding with Funding Circle is that they will forward-fund, which in my experience is revolutionary.
That keeps the build moving and helps to ease cash flow, a major part of any development. Having funds in advance relieves some of the pressure.
Traditional finance institutions have been known to pull development funding part-way through a build, which is a nightmare as it leaves the developer with a half-built site that could in the worst case scenario be worth less than they paid. Funding Circle, however, can’t let deals go down. They only lend on live deals, rather than agreeing a facility in advance as banks do, and put it up on the platform the week before you need the money. The worst thing that could happen from their point of view is that the project does not get finished, so their priority is in line with yours as the developer – for the asset to be worth something at the end. If it’s pulled halfway through, they and their lenders won’t recover their money, so they have a vested interested in the project getting finished.
This is short term finance with a two-year maximum, and they have thousands of lenders so have a lot of money in the system. They also have a reserve of government-backed funds, not that they’ve ever needed it for our projects, but it’s there if they need to step in and inject money to get a build finished.
Funding Circle will lend up to 70% of gross development value (GDV), which can be split a couple of different ways. The way we have worked is to use private loan finance to buy the land, then crowdfunding for the development, which usually works out at 100% of the build cost. The platform takes the first charge on the property, and we issue personal guarantees for the private loan finance. This combination has worked really well for us.
Lloyd: With regard to interest, Funding Circle's rates are generally 8%-9% pa with an arrangement fee of 2%-3% (depending on the size of the development. In total, it works out at 10%-12%.
As far as borrower experience is concerned, the platform wants to see a track record before lending, to be confident that you are competent to undertake and complete the build. We were able to provide Andi’s building experience as evidence of what we could do. Someone with less experience would need to rely on their team – with development the power team is key. For example, you can JV with a builder, as long as that individual can prove experience.
To find out more about their course or their projects, email firstname.lastname@example.org. Alternatively, pop along and see them at the Northampton PPN meeting, which they host on the third Tuesday of every month.
Victoria Street, Irthlingborough
Purchase price (with planning for 11 houses): £200,000
Development costs (100% from crowdfunding): £750,000
Total spend: £1,045,000
GDV (end value): £1,684,000
Cash flow pcm: £8,400
Lloyd: We are close to the end of this project and in the process of refinancing it at the moment. We bought the land, which already had planning permission for eleven 2-bed houses, directly from the vendor. Our estimate was that the end value would be around £1.4m-£1.5m with a build cost of around £750,000, the sum that we applied for and got from Funding Circle. However, our total spend was just shy of £1.1m, but the revaluation has come out much higher than our original estimate. That’s a nice bonus! We tend to underestimate the GDV and overestimate costs on projects.
Crowdfunding Property Businesses
This month, Nick and Andy from Smart Property are back to talk about investing in property businesses through equity crowdfunding. The internet has enabled this method of investment to grow to levels unimaginable even ten years ago and it is now the most widely utilised method of crowdfunding. The guys have been investing in crowdfunding campaigns themselves for the past five years and are sharing their insights into this new and exciting form of investment as they take Smart Property through the process on one of the biggest online platforms. (See below for details!)
What is equity crowdfunding?
Quite simply, equity crowdfunding is a mechanism that enables small investors to fund start-up companies and growing businesses in return for an equity share in that business. As with any type of share, if the business is successful, the value goes up. If not, the value goes down and you could lose your money completely. But get it right and there is the opportunity for big rewards. How many of us would turn back time and invest in start-up companies such as Facebook, Instagram and Whatsapp during their early days! Could a property business be the next big thing?
Equity crowdfunding is now an established industry and investment opportunity and is heavily regulated by the Financial Conduct Authority. Leading the way worldwide is a UK-based company called Crowdcube, which has to date has raised over £171,363,000 for 420 start-up companies and has over 291,000 registered investors. Seedrs is another UK-based equity crowdfunding platform operating in a similar way, providing further opportunities to invest in small business across a wide range of industries, including property. Kickstarter, an American platform, has received pledges of more than $2.4bn to date. It operates in a different way to the equity crowdfunding platforms by offering their backers rewards such as new products and experiences in exchange for backing creative projects.
Notable crowdfund successes
Notable successes on Crowdcube to date include: Rentify (£1.38m), Easy Property (£1.35m) and Brewdog (£815k). Also of note is E-Car Club who in 2015 became the world’s first successful crowdfund exit following their successful raise of £100,000 in 2013 through Crowdcube. E-Car Club exited through a sale to Europcar giving investors a multiple return on their investment.
Appraising crowdfund investments
Whether you’re looking at investing in a property company, or considering pitching your own business, there are a number of considerations you need to make. For many, investing in a start-up company is not entirely about the money; investing as part of the crowd can be fun, particularly if you have a real interest in a particular industry or company. It can be a hassle-free way of supporting and sharing in their future success. We’ve put together some of the things to look out for when investing in start-up businesses.
Crowdfunding platforms and investors often look for unique ideas or alternative angles to existing business strategies. Companies with ambitions to disrupt, remould and reimagine the status quo are some of the more lucrative to be involved with. On crowdfunding sites, change is embraced and going against the grain is often to go with the grain! That said, some of the most successful campaigns are simply those that highlight new or developing opportunities and vow to do things better than their competitors.
The reputation of the entrepreneurs
The reputation of the entrepreneurs behind the business is key to prospective investors and a key determiner in whether a funding campaign will be successful or not. Have they got the experience, skills and knowledge to do what they say they are going to do, and can they back it up? Do they have a supportive network, do they share your values, do they show integrity and absolute commitment, and are they trustworthy individuals?
Branding and image
Strong and effective branding is essential to any business on a crowdfunding platform. The crowd want to see a brand that represents the business values and visions. It needs to be highly targeted to the end user and must be capable of capturing the attention of a wider audience as the business grows. Crowdfunding platforms will also want to see Intellectual Property Rights over their image and branding.
A company’s trading history is essential to determine viability and growth projections, and evidence of personal investment from the entrepreneurs behind the business demonstrates their commitment to the idea – do they have skin in the game themselves? This doesn’t mean to say that a business has to show profit from day one; all great companies started from very little, if anything, after all!
Smart Property are crowdfunding!
Smart Property are entering the exciting next phase of their business and are offering YPN readers the opportunity to invest with them now through one of the world’s largest crowdfunding platforms. Head over to the Smart Property Investment web site to find out more!
Please #investaware. Investments of this nature carry risks to your capital as well as potential rewards.
As the mechanics of longer term property investment become more complex, the concept of holding shares and benefitting from the upsides while letting someone else deal with tenant hassle and maintenance headaches could become more attractive for the less active investor.
The advantages for hands-on investors and developers are unmistakeable – access to new channels of funding, exposure to a huge new pool of people with money to invest and a lot less admin than when managing independent private lenders. You might pay more, but being able to add a new string to your funding bow is positive for your business in the long run.
Whether you prefer to be hands-on or hands-off, keeping all your options open and understanding all the investment channels out there in these uncertain times is essential for your future financial wellbeing.