Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500

But is it safe for landlords and tenants?

Landlord Army? Could crowdfunding bring buy-to-let to the masses? (Getty)

Britain’s love affair with property continues unabated, despite the 2008 house price crash and fears that house values have risen too far above wages. Still we dream of owning our own home, and someone else’s too.

Figures from the Council of Mortgage Lenders show that the value of buy-to-let lending currently stands at £27.4bn, its highest level since 2008. Most landlords are solo investors, managing their portfolios in a traditional way, yet a small but growing section of the market could one day disrupt the established buy-to-let model: crowdfunding.

It has become quite common for groups of small-scale investors to band together on crowdfunding websites to provide money for charities and start-up businesses, but they can also do the same for loans and mortgages via a number of specialist sites. Crowdfunded buy-to-let has ignited interest among investors who want a slice of the property market but lack the capital to create their own portfolio. Many analysts suggest this growth has been partly fuelled by the low interest rates on offer to savers.

There are a number of companies offering “crowd-to-let”, among them Property Moose, which allows investors to pay as little as £500 for a share in a rental property. There is a 5 per cent initial fee and the company receives 15 per cent of any profits, including when a home is sold. In just six months, it has grown to include 3,000 members and funded more than £1m of property deals.

Andrew Gardiner, chief executive of Property Moose, says: “The rise of crowdfunding has been accelerated by people’s distaste with the banks. By taking the power away from the institutions and giving it back to the people, we are democratising the way people can invest.

“Property was just the next step on the crowdfunding journey and lends itself well, as it is an investment in a tangible asset that everyone understands and can put a value to.”

Democratising property investment sounds a lofty ambition, but there is genuine interest in this cheap entry to buy-to-let, particularly as the new pension freedoms have made it easier for people to invest their retirement savings. In the last week alone, Property Moose has received five calls from retirees looking to invest more than £50,000 each.

Mr Gardiner says: “Crowdfunding opens up the market to everyone so they can invest in property for a much-reduced commitment … Plus, it allows people to diversify across asset types and geographic areas, helping to spread risk and, hopefully, increase returns.”

Members can put their money in both residential and commercial properties, bringing a degree of diversity to their portfolios beyond the reach of most solo landlords.

Bernard Clarke at the Council of Mortgage Lenders agrees that crowdfunding has benefits in allowing low-level investment and providing the opportunity to spread investment risk. But he warns that this new model has not yet been tested in all market conditions, adding: “There are potentially problems getting in and out of your investment. Much depends on the property, but you do need to have a market for shares of the property if you want to get out.

“Although crowdfunding is growing rapidly, it is still small and so there may not be the interest in shares that there is in selling property wholly on the market. And if you’re trying to sell shares at a time when the market is depressed, that might be harder.”

He points out that crowdfunding investors tend to be passive, with no say in decisions about a property, even though the costs of maintenance will come out of their returns. Of course, a sole landlord will also have costs and may also pay agent fees, though some manage their properties themselves and retain all returns.

Meanwhile there could be changes over the next few years in how the crowdfunding industry is regulated. The Financial Conduct Authority has expressed concerns over equity crowdfunding and peer-to-peer lending businesses, reporting that some have offered a “misleading or unrealistically optimistic impression” of the potential for growth and the security of investors’ cash. Certainly, funding start-up firms is risky, with figures from the insurer RSA showing that more than half do not survive more than five years. However, private rental property remains in short supply in many areas, causing rents to rise faster than inflation, and giving some crowdfunders more confidence in their investment.

What, though, would it mean for a tenant if their home was owned by a collective rather than a single landlord? Would it make a difference to how quickly their boiler got repaired or whether or not their rents rose? Mr Gardiner says it is in the investors’ interests for tenant to feel fairly treated so the property remains occupied. Mr Clarke suggests it could even provide greater security for residents: “If somebody wants to opt out then they can sell their share, but the company that is running and managing the property will continue to look after it. That means the tenant may have a little bit more certainty that the property is available to rent for a longer period than would be the case if it was owned by an individual landlord.”

Not everyone believes the rise of crowdfunding is a good thing; the Royal Institution of Chartered Surveyors has expressed concern that such easy access to property investment could exacerbate volatility in the market. Whatever the risks, crowdfunding continues to grow in popularity across a number of industries. Crowds of online investors now fund UK charities, provide start-up loans to UK businesses and own UK homes. The internet has already democratised knowledge and, as Mr Gardiner says, the next step could be to democratise investment.

Further information: propertymoose.co.uk; thehousecrowd.com; crowd2let.com