Why you should consider crowdfunding for your next property development

John Friis, Qandor member, Managing Director and co-founder of Watermark Homes, writes about the advantages of getting funding through crowdfunding.

In 2018, in partnership with former Qandor member Lafina Diamandis of Eurekadoc, Watermark Homes successfully partially funded the purchase of our Catherine House development through crowdfunding.

A conversion of an office building in Borough Green, Kent into 5 apartments, this development, nicknamed ‘The Doctors’ Project’ (since both Lafina and I are doctors), was over-funded on the Simple Crowdfunding platform in just seven minutes!

In this article, I shall outline the benefits and advantages of crowdfunding for both property investors and developers. But first things first: what exactly is crowdfunding?

What is property crowdfunding?

Property and real estate crowdfunding is a comparatively new, but increasingly mainstream and popular, way of both investing in property and raising money to fund the purchase and/or development of a property.

A large number of individuals invest, typically online, each contributing a small percentage of the overall total required.

What individual investors receive as a return depends on how their investment is structured. This may be either a share of the profits once the property is developed (and sold), a fixed monthly or annual return, a proportion of the rental income from the developed property, or indeed a combination of all three.

What are the benefits of crowdfunding for property investors?

• Crowdfunding multiple projects (avoiding putting your metaphorical eggs in one basket) is a way of mitigating risk and allows investors to create a diverse investment portfolio.
• With comparatively low minimum investment limits, it is much more accessible to investors who cannot afford the high upfront capital expenditure associated with more traditional forms of property investment.
• It avoids the less appealing aspects of other forms of property investment e.g. having to be directly involved in sourcing, negotiating, or managing refurbishments or tenants.
• Crowdfunding platforms make the investment process simple, fair and transparent for investors. Moreover, crowdfunding is a very regulated industry and, while no investment is ever risk-free, these platforms conduct themselves in accordance with the Financial Conduct Authority (FCA)’s strict codes.

What are the benefits of crowdfunding for property developers?

Save time

Engaging with investors can be surprisingly time intensive. This is especially true:

1. When setting up a new limited company special purchase vehicle (SPV) prior to the acquisition of the development property;
2. During the construction phase when providing investors with updates on how matters are progressing.

They will handle all the KYC (know your client) and AML (anti-money laundering) requirements which investors must provide to the developer’s and the senior debt lender’s solicitors.

Convenience

A crowdfunding platform facilitates effective developer-investor interaction, particularly in the initial, formative stages of the relationship.

Discussions about legal documentation provided by the developer’s solicitor to the investor, and therefore changes to the documentation as a result of these discussions, are minimised. In a time-sensitive transaction, where the deadline to completion of purchase, for example, is approaching all too quickly, this can be crucial for success!

As the development progresses, they will also provide a means for sharing written or video project updates to investors and provide a private online forum for investor questions. The ease of having an online archive and record of these interactions in one convenient online space cannot be underestimated.

Save money

While it is true that crowdfunding platforms will charge you a fee for the service they provide, there are at least 2 reasons why they may very well save you money.

In contrast to individual investors or firms providing private equity who may expect you to stump up solicitor’s costs, the investors ‘in the crowd’ are responsible for the fees of any legal advice they may wish to seek to interrogate the loan or shareholder’s agreement your solicitor has drafted.

The crowd may also choose to accept a lower percentage of the expected profits or a lower fixed return on their investment in a particular development project than an individual investor investing a large sum of money would. However, this is obviously not a given!

Greater security (less risk)

Legitimate crowdfunding platforms (such as Simple Crowdfunding, Crowd with Us and CrowdProperty) are FCA authorised and regulated. Moreover, for each opportunity these platforms promote on their websites, they will have conducted extremely detailed background research and fact checking on both the property and the developers themselves. Investors and developers alike should take reassurance from these levels of due diligence.

Long-term play (butterfly effect)

When you have a successful property project, which generates the expected returns, an investor is likely to

1. Reinvest;
2. Tell other people about their experience.

If you have a project with 1 or 2 investors, you would expect that these investors would each tell one or two of their friends and colleagues about their happy experience, some of whom may, in turn, then invest in your next project. Now imagine this multiplied by 10, 20, 30 or more depending on the size of your ‘crowd’.

Building an investor base takes time. An online crowdfunding platform can therefore be a real boon.

Once your first project has made its expected profits for your ‘crowd’ (and you’ve kept them updated, building trust along the way), the next time you want to raise some equity, your crowd will be right there, keen to invest again!

Qandor is a property club for professionals in property and construction. Through several networking opportunities and exposure, we aim to help you in growing your portfolio and moving forward in your career. To know more about becoming a member, send us an email or click on this link. We also have a bi-monthly online magazine, Q. Magazine. To check it out, click here.