Why Property Developers Should Turn To Equity Crowdfunding
It seams like crowdfunding is gaining more and more popularity. In this article we will discuss why property enthusiast have started to turn to this new alternative way to raise property development finance.
In my crowdfunding business series, I detail everything there is to know about crowdfunding your business.
I must admit that property crowdfunding is not much different than business crowdfunding. While many of the same basic principles apply. However, with property a lot will depend on the platform provider you decide to use.
Time for a quick story
You can skip this section if you like! However if you are interested in how my property story began. Please feel free to keep reading.
So let me start by saying not only in the UK but all over the world. To my knowledge anyway people like you and me have always shown an interest in property. My Dad was a builder so even as a little girl I would spend most of my weekends. Just nipping out with my Dad to the local builders merchants.
As a builder my Dad had a dream to build his own home. Which I believe is a dream shares by lots of builders. So it will be no surprise if I tell you in 1986 my dad single handedly built hi own home. If you are interested you can view a picture by clicking this link.
I must admit I always knew I would get into the property development game at some point in my life. So it was no surprise when at the young age of 21,I purchased my first rental property. A little 2-bedroom terrace for 17k, not bad to say it went on to generate a rental income of £385 per month. Which then provided a rental yield of just over 27%.
Whoopee them were the days!
As I sit here looking back over he years. Todate I have purchased, flipped and renovated 23 houses.
When you say it like that no wonder my husband asked me to sign a written agreement. Stating I would not do anymore after I complete the one I am currently working on lol !!.( I did not sign the agreement by the way)
Over the years I have accumulated 4 long term rentals. Also just like you I am always on the lookout for the next opportunity!
Anyway, I have digressed, but there is a reason why I am telling you this. Over the years I have seen lots of changes in the property market.
From being able to purchase a property with just a 5% deposit. To today where a 30% deposit is required, if you want to get a decent interest rate. Personally, I don’t know about you but I feel personally that buying an investment property today is more challenging than ever before.
If you think back just over the last few years. The banks have put tighter controls on lending, interest rates have risen and deposits have got large. Plus eligibility criteria has now made it impossible for some people to even get started.
So, now you know why I am personally very interested in anything alternative that is property related.
Why do entrepreneurs still rely on banks?
For those of my readers that know me. You will know I am a true supporter of equity property crowdfunding. Plus I encourage all my readers to try this new funding method to grow your business.
Don’t get me wrong I understand that you will be sceptical. Just like many others out there. Property crowdfunding is still relatively new and still only accessed by a few. You can check out this recent report by NESTA on the trends of crowdfunding in the UK
I just want you to take a minute, let me ask you a few questions.
- How long have you been working in the property sector?
- Have you ever used equity crowdfunding for one of your property projects?
Some of you will have been in the property market for years. However I bet most of my readers answered NO to question two.
So, you see my point, there is still a long way to go. Many entrepreneurs still rely on their bank manager or finance brokers to fund their projects.
Anyway I first of all want you to give you a pat on the back. You are already starting to seek out and look at alternative funding options. This is a sign that you are not happy with your current financial arrangements and want something better right!
Well in return for your efforts, I have also been busy. So far I have already started to partner with some leading platforms. While taking the time to drill down on the nitty gritty. So that you don’t have to. You can check out my partners on my website by clicking this link.
What Makes Equity Property Crowdfunding Different?
You have now read everything you need to know about crowdfunding. So what we need to identify is what makes equity property crowdfunding different.
Property crowdfunding sites vary significantly both in what they offer as well as how funds raised can be used.
Crowdfunding platforms for property fall into two sections.
- Looking to invest
- Raise investment
If you are reading this post I think you will most probably be type 2.
So property platforms can be used to raise funds to help with development. Alternatively, to increase or refinance your existing property portfolio.
The first thing you need to to be able to do is answer yes to this question.
Are you an experience property developer or landlord?.
So, if the answers yes keep reading
As an experienced developer or landlord, you will be able to raise equity crowdfunding. Investors will receive a share of the income and capital growth if its buy to let. Alternatively, a share of the profit if it’s for a development project.
How does it work
Before you can get started most platforms will require you to make an initial investment. This amount will vary, however as a minimum its around 5% – 10% of the funds you are looking to raise. If you are struggling with this you may be eligible to secure a PAYG line of credit. You can check out some of my partners on my website by clicking this link.
I am sure most of my readers will already have thought about JV. You may have even looked for high net worth individuals in the past. Well the good news is you can achieve the same thing with crowdfunding (the crowd). Just like with a JV the crowd will receive a share of the profits.
Most of the platforms will handle the legal, governance and distribution of profits.
As a landlord myself, I know how hard it can be to secure the 30% deposit. Plus the funds required to then refurbish. In the same way as listed above you can also raise these funds from the crowd. All you must do is agree to share income and the capital growth in return.
What can you use it for?
Developers can use it mainly in the following three ways:
- New builds
Properties which you plan to develop for sale, this can be or in units.
- Residential Conversion
This could include offices, pubs or any building being converted to residential use.
- Develop to let
Properties that you plan to renovate. Then on completion you will let them rather than sell them.
How does the equity model work?
Normally the chosen platform will set up a Limited Company. The main purpose is to hold the asset which in this case will be the property. You will see this referred to as a special purpose vehicle also known as (SPV).
I have found this great little video from Estate Brown who provides a great explantion.
What is SPV?
The Legal Stuff
Noteworthy, many of the platforms will provide the legal and financial frameworks. They will in most cases also provide the communication between you and your investors.
Typically, fees will vary, you can find the fees for my specified partners by clicking this link to my website.
What's The Process
Well this again will vary from platform to platform. However, for this example we will take one of my property equity crowdfunding partners Crowdlords.
You will already have read about the crowdfunding process for businesses. Well crowdfunding for property development still has a mixture of traditional services mixed with modern technology. So, what do I mean by that well:
- The first thing you must do is register on your chosen platform. Note this is subject to platform approval.
- Now the traditional bit, a meeting face to face with the platform provider. This is to discuss your development opportunity. Also identify your investment needs and the types of investors you are trying to attract.
- Once you are accepted there will be an inspection of your plans. In most cases you will require full planning approval. This should be in place before you make anytype of application.
- A site visit, this will be to discuss the fine details. This is the final part of the initial assessment.
- Unlike with business crowdfunding, most property platforms will prepare the development listing. On completion your approval will be required, before listing on the platform.
- The platform will then take the responsibility of marketing the opportunity to new and existing investors.
- Once the funds have been raised the platform will handle the legal and financials.
- A project manager will be appointed who will ensure your funds are released.
- On completion of the project. Your project manager will ensure the distribution of profits to the shareholders.
So, in a nut shell, you find the property, the platform creates and publishes the pitch. Then secures the investors and completes the deal. So, you can then get on with the project.
Still not convinced, well here are some reasons. You should really think about equity crowdfunding your next development project.
- You get the opportunity to build your own tribe of avid investors. They will become loyal followers willing to share in your projects risks and rewards.
- If the market turns you have the option to refinance. Alternatively you can choose to hold onto the property until the market recovers.
- With equity crowdfunding, unlike with banks there is no debt .
- No need for bank dependence with forever increasing high interest rates.
- Should things not go to plan, you have no worries of the bank pulling the plug.
- All my platform providers just specialise in property. They understand the industry in depth.
- Some of my property partners have used crowdfunding to fund the growth of their own business. This makes them thoroughbreds. Plus for you it does not get much better than that.
Still need a bit more convincing
Well first of all you only need to look at America. It’s a fact America has always been a couple of years ahead of us in their thinking. To date their top 3 sites in equity property crowdfunding have already funded more than $3 billion just in the last 3 years. Plus they now have over 140 crowdfunding property sites.
This sector is the future and it’s only going the get bigger.
I want you to just stop doing what you are doing. Take a few minutes to have a quick look around you. I bet someone close by is using some type of technology. Whether that’s mobile phone, iPad or desktop.
Watch this space as technology makes traditional lending and investing a thing of the past. Technology is opening the door to a new:
- Way for you the property developer to grow your business and build your dream.
How To Tap Into My Services For Free
If you decide to complete an expression of interest form for one of my partners. I will personally complete an initial review of your business proposal.
As part of my service to clients I offer a pre screening of your application, based on the eligibility criteria. Followed by submission and negotiation service with the chosen provider.
Furthermore, should your business be selected as a client I will provide the mentioned service free of charge.