By Frazer Fearnhead, CEO and co-founder of peer to peer lending plaform The House Crowd
Debt-based property development crowdfunding – a form of peer-to-peer lending used to raise funds for property developments – is on the rise. But before investing in these types of property development projects, you need to know the benefits and risks. Let’s look at both.
Why use peer-to-peer lending to invest in property?
First, why is peer-to-peer lending growing in popularity as an alternative to traditional property investment strategies, such as buy-to-let? Simply put, it offers several advantages, including:
- You don’t have the hassle of actually owning and managing a property
- It can offer predictable, consistent returns
- Your cash isn’t tied up for years, as loans are often short-term
- Investment platforms help you spread capital across multiple loans, helping you to manage and mitigate risk
- You can start investing with as little as £1,000 on some platforms
- You are investing on a debt basis and therefore will get paid out before the equitable owners
Peer-to-peer property lending is therefore a great option for those seeking an alternative to traditional forms of property investment. It can be a valuable and reliable addition to any investment portfolio, particularly those geared towards saving for a long-term goal, such as retirement.
But, as with any type of investment,peer-to-peer development lending comes with a degree of risk. And if you want to do it right, there are a number of important things you should know before investing.
- Make sure your platform conducts due diligence
Before investing, then, you will want to see evidence of the property development research done by your chosen platform, including
- The results of a RICS survey
- A list of recent ‘sold’ prices in the area
- Prices per square foot achieved on similar properties
- Feedback from agents in the area
- Information on market liquidity
- Relevant economic forecasts
Similarly, your chosen lending platform should work with the best people at every stage of the project, even if it costs more. This ranges from the surveyor’s firm to picking contractors that will agree to a fixed price design, build contract and deadline.
All this will help you work out whether a project is worth investing in. If the platform does not volunteer this information, ask for it. And if they still won’t share it, look elsewhere.
- Understand how your investment will be repaid
Knowing how – or, more importantly, when – your investment will pay out is vital. As such, you should ask about the chain of investment, including the payment timeline.Some platforms will pay all capital and interest back to the investor at once; others will pay back all capital before paying out interest.
Debt-based investment offers greater security on this level, since it is always paid out before equity investment. And with a fixedrate investment, you’re earning interest until you are repaid, so you get consistent returns, even if the property takes time to sell.
- Make sure your money is protected
Any investment will come with some risk, but debt investors should be protected by a legal charge on the property. This will mean the property you’ve invested in cannot be sold without you being repaid.
Then, even if the borrower defaults, the developer can still force a sale of the property to safeguard the money invested.As an equity investor, by comparison, you have very limited protection. And if the development makes a loss or the borrower defaults, you could lose the money you put in.
- Check for planning permission
Making sure you have planning permission for a building project might sound obvious. But you’d be surprised how many property developers simply assume that they’ll get approved. It doesn’t always work like that, though, as it can be a complicated process.
Nobody likes it when a building site pops up next door, after all, so appeals from locals are common. And people can lodge an appeal both before and after permission is granted, which can lead to long and unexpected delays. So, to reduce your risk, you should always make sure the developer has completed the application process, with no appeals outstanding, before investing.
- Look beyond London for a development location
While London has been a hotbed of property investment for some time, it may now be better to look outside the capital, especially with Brexit hitting London house prices hardest.
For instance, forecasts suggest that property prices in the North West will continue to grow by around 21% over the next five years. In addition, the government’s ‘Northern Powerhouse’ campaign has boosted business in the region over the past five years, so people are moving there seeking work. And when people move somewhere in large numbers, demand for property inevitably grows.
In other words, there are great investment opportunities out there if you look hard enough. And it makes sense to consider a variety of market conditions and average price forecasts.
Should I invest in peer to peer property development lending?
The best way for you to invest your money will depend on your individual circumstances. But peer-to-peer property development lending can make up a key part of any investment portfolio, especially if you need to make solid, consistent returns to bolster your retirement pot.
And if you ask the right questions before investing, you can minimise the risk involved.
We’re also running a crowdfunding campaign on Seedrs in order to expand our product range, find out more here.