Straight to the Point
- Giving up control
- Issues around voting
- Lower returns
- Lack of liquidity
- Issues around security
- Just not for me!
Why Property Crowdfunding?
There are lots of information on the internet which goes into detail about what property crowdfunding is about. Put simply, it allows groups of people to pool money together to buy property. Those who are keen on it would say the benefits include:
- Ability to invest in property for as little as £10.
- Ability to spread a small or large investment across multiple properties and regions.
- Potential to profit from rental income.
- Potential to profit from the rise in value of the properties.
- Hassle free by not needing to involve solicitors, deal with letting agents, talk to tradespeople to resolve maintenance issues or keep up to date with Buy to Let legislation.
- Ability to select individual properties to invest in as opposed to investing in a REIT (Real Estate Investment Trust) where the holding would normally contain a large number of properties.
We own a small property portfolio (invested in our own names), but we are always open to alternative ways to invest in property, especially due to the advertised benefits above. As a result, 18 months ago, I invested a small token amount on a property crowdfunding platform: Property Moose. A property crowdfunding platform is where you would go to find properties being made available to invest in. Once there are enough investors who are interested in a particular property so that it can be fully funded, then the investment goes ahead. The property is then purchased by the platform and you would own a portion of that property based on the number of shares purchased.
Around mid-2017, I invested enough to buy one share in a property on the Property Moose platform. I chose Property Moose as it appeared to be quite popular, seemed relatively well established and their website was easy to use. The process of registering on their website was very straightforward and within minutes I was ready to invest after confirming I have investing experience and understood the risks (Appropriateness Test Confirmation).
After browsing the properties that were available, I chose one that was in Manchester. It was a 4 bed HMO (House of Multiple Occupation) with a one-bed studio. The property projected a net rental yield of 4.49% (after costs and management but before tax). The rental income would be paid quarterly. At the end of the initial 12 months term, investors would then take a vote on what we would like to do with the property. My investment was £10 – the minimum allowed at the time.
Over the course of this investment, I received £0.31 in rental income (after costs before tax). This provided me with a 3.1% rental yield on my £10 investment. So for every £100 invested, I would have received £3.10. What about capital gains? This is unknown at the moment as the property has not been sold. The property has now been transferred to UK Diversified Property PLC to form a single large property portfolio. The value of my one share (initially purchased for £10) is yet to be determined. However, Property Moose have undertaken valuation on a batch of properties and determined that the average is as follows:
For someone who had invested the same amount in every property in this batch during the primary listing, they would have seen a total return of 13.35% over the life of their investments (assuming they remain and based on the open market valuation). This is made up of capital growth of 5.95% and paid dividends of 7.40%.
For someone who had invested in the same way but is choosing to exit as soon as possible at this point in the market at the 4-week valuation, they would see a total loss of -4.63% made up of a capital loss of -12.03% and paid dividends of 7.40%.
(Source: Property Moose, Transfer Valuations to UK Diversified Property PLC dated 06/12/18)
When they talk about dividends, it also means rental income. As you can see, the rental yield on the property I chose to invest in was significantly lower than the average as a result of void periods.
In relation to the future, they go on to say:
This shows that, on the basis of the properties that have been valued in this batch, the total projected gross yield is 11.36% p.a. based on a fully let basis (gross does not take account of any costs of operations). This is very healthy and significantly ahead of past performance due to the various improvement works that have been possible on the properties and the increases in rent that this should provide for. In addition, the costs of operating the portfolio should reduce due to the improvements to the properties and the resulting shift in tenant demographics that this should allow (meaning the Company is targeting long term, professional and family tenants).
(Source: Property Moose, Transfer Valuations to UK Diversified Property PLC dated 06/12/18)
The headline figure of 11.36% gross yield per annum (before costs and tax) sounds great especially when this does not factor in future capital gains assuming the share is held for the long term. However, like everything investment related, the future is not guaranteed and projections are merely guesses at best based on a number of assumptions (sometimes overly optimistic ones).
Comparison to Our Own Property Portfolio
It turns out that it is actually a little more difficult to compare the 3.1% Property Moose rental yield with my own because I am actively paying off the mortgage debts. This is because the more I pay off, the return on investment (ROI) reduces due to the way it is calculated:
ROI = (Profit Before Tax / Money Invested) x 100
So for the Property Moose example, the true ROI is incomplete as I do not know how much my share is currently worth. However, ignoring any capital gains in doing this comparison:
Property Moose ROI = (£0.31 / £10) x 100 = 3.1%
Property Portfolio ROI = (£11,263 / £231,226) x 100 = 4.9%
The ROI on our property portfolio based on tax year 2017/18 consisting of three properties at the time was 4.9%. This was calculated by taking the total rental income less expenses apart from tax and divided by the total amount of capital payments made on the mortgage. I think this would be a more accurate representation as opposed to dividing the profit by market value or purchase price. With market value, it is not actually realised until it is sold so the value used would not be accurate (i.e. it could be an over or underestimate). If I were to just use the purchase price, this it would not be a true representation as it would include mortgage debt which strictly speaking is not my capital to begin with. If we were forced to sell our properties today, the mortgage company would want their money back so I cannot use it to reinvest as I wish.
As you can see from above, our strategy of paying off our mortgages gives us a much lower ROI figure than if we took a traditional approach of just paying the interest. To illustrate this, if we took the traditional approach, our ROI would be:
Illustrative Property Portfolio ROI = (£11,263 / £122,875) x 100 = 9.2%
The illustrative 9.2% ROI is based on use placing a 25% deposit on all the properties based on market value at the time they were bought and only making interest payments thereafter.
In terms of potential Captial Gains, although this is not realised and subject to fluctuating housing market conditions, on paper at least, Property 1, 2 and 3 have gained 30%, 15% and 6% respectively. Property 1 is a property we have owned for 11 years now, bought at the height of the 2007 property boom. Goes to show, even when you buy high, if your strategy is long-term, the trend is still up. Properties 2 and 3 were bought within the last two years.
I will write in more detail about our property portfolio, our experience as landlords and lessons from refurbishment projects in future posts.
Why Property Crowdfunding Is NOT for Me?
I came into this with optimism and an open mind. There was a part of me which hoped that it would be so good, that I might even shift some of our allocations towards this form of investment. However, it’s just not for me which I will explain below. I am aware that in reaching this conclusion, I only tried one platform and invested in just one property so as always, do your own research and decide for yourself. The relatively low return I received is far from universal and I have heard of people who have received much higher returns. So please, don’t base your decision solely on my returns; had I invested more money and in a wider selection of properties, the returns might have well been better (…or worse). I can definitely see its appeal, especially for those who struggle to get onto the property ladder or wish to have property as part of their asset allocation without the hassle of actually owning one or having a deposit to fund the mortgage. For me, the negatives far outweigh the positives. It feels like it sits somewhere in between full private property investing and REITs. If I wanted an easier life, given the choice between property crowdfunding and REITs, I would not hesitate and choose REITs. My main reasons for not investing further in property crowdfunding at this moment in time are as follows:
Lack of Control – I enjoy searching for the right property to invest in, visiting them and doing the numbers. I want to be able to select the management company and have a final say on the potential tenants. I want to have full control of the style and quality of any refurbishment. I want to choose and get to know my maintenance people. I want to have a say in how much rent to charge. The list could be endless. Property crowdfunding means giving away this control for an easier life. You are one of potentially hundreds of other shareholders for each property.
Voting – This brings me to the issue of voting. All big decisions such as how and when a property is sold are decided by a majority. It makes sense, but this brings about a few issues:
1) Who is to say the majority decision is the wisest decision? Particularly if individuals who are attracted to property crowdfunding are novices, they would fall foul of selling low and not understanding The Property Cycle. Even if they did understand the theory behind it, their lack of experience may get the better of them, cause them to give in to the fear and to follow the herd;
2) Property Moose, and I imagine other platforms have a default option for those who are too lazy or forget to vote. I would be interested to see what the average response rate is. I would bet that it is pretty low. This means that I would be relying on others to put in the effort, read the literature, do their research and make sensible logical decisions. I think many would fail at the very first hurdle and click delete when that voting email comes around. I don’t like the idea of important investment decisions be left in the hand of hundreds of other shareholders. Also, call me a cynic, would a platform be motivated to have the default option also be the easiest or more profitable option for them? Again, show me the response rate. As far as I understand, there is not this level of transparency.
3) Voting takes time. Decisions will take long to be reached. As a result, markets could have moved on and context around why a decision was needed in the first place might have changed by the time the voting is organised and votes are counted.
Lower Returns – I can imagine this being a controversial point. What I mean by this is that, for an experienced property investor who takes an active interest in how their portfolio is managed and perform, I would expect for repair costs, management fees and void period to be kept to the minimum as all these eat away at the bottom line. Investing through a Property Crowdfunding means that if a property is underperforming, your only option is to sell the share or take a vote, but even then, that may not be that straightforward.
Lack of Liquidity – If I thought private property investing was illiquid, then doing so via crowdfunding was even more so. The market is limited to buyers who go onto that specific platform. As of early this year, Property Moose stopped the Secondary Market altogether. Now, it would appear the only option would be for me to go out and find someone to buy my share myself. If I am able to do this, then Property Moose will transfer the share over to them once they register with them. Even if Property Moose or any other platform were to offer share selling, I would be very cautious. It’s very niche in my opinion, more so because the potential buyers would need to be interested in that specific platform, not just the property. It’s like buying a house on Rightmove but the decision also hinges on whether they like Rightmove. I would also bet that a house that is priced realistically would be quicker to sale and complete than shares from property crowdfunding.
Security – if you decide Property Crowdfunding is for you, then remember to investigate what would happen if the platform liquidates. Would you lose all your money? Is it completely and legally separate from the platform? Property Moose has this to say, but not all platforms are the same and I wouldn’t base this as a cast iron guarantee either:
“It is extremely improbable that we will liquidate, and remember; you are not investing in Property Moose. Each property you invest in cannot be affected by the loss of Property Moose. Your investments are held in a Special Purpose Vehicle. This means that if anything happens to us, all of your initial investment is ring fenced and will be returned to you by our liquidators and legal team.”
Remember, please do your own research and reach your own conclusions. Laurence from Financial Thing does a detailed write up of his experience with Property Moose which is worth a read if you’re considering adding this to your investment portfolio.
PS. I am writing this on Christmas Day, so Happy Christmas to you all. I am working during this period so will be away from home (sad face), but at least I can finish this post. It’s not great but I know it won’t be like this forever.