Many people wryly remark, that the best way to make money out of property, is to be the mortgage lender, which would be difficult with just £1000 to invest in property! After all, mortgage lenders can lend at rates that are certain to make them money, with the loan secured against the property, so there’s very little risk. Ordinary investors have until now, been locked out of this market, which was solely the preserve of the building societies and large banks.
A new type of Property investment:
With the democratisation of lending that has taken place since peer-to-peer lending and crowdfunding arrived, the lenders’ closed shop is in the process of being shaken up, for the first time in over a century. It’s another example of the disruptive innovation that has changed so much of the financial market since the arrival of the internet. So it is really possible for private investors to become their own mini building society? Indeed it is, and it is possible if you only have £1000 to invest.
How do crowdfunded property investments work?
Property investments secured against property, are being offered by crowdfunding platforms. How it works, is that a developer or property manager approaches the platform, and applies for funding. The platform puts up the details of the funding and the property against which it will be secured and invites people to fund the investment.
How risk is managed
Obviously, the less risky the investment, the lower the return rate a developer or property manager can secure. The beauty of this is that it also works in reverse. An investor with a large appetite for risk can choose a higher rate, and accept more risk. An investor with a low-risk appetite can choose a lower rate, with less risk.
Risk is in any case, controlled by the fact that the investment is secured by a charge on the property. During the investment term, the investor may get a “dividend” on their investment. And at the end of the investment, the money plus the interest incurred is repaid to the investor.
Example: Converting a property into six flats
The crowdfunding aspect further reduces the risk. Say that a developer wants to borrow £500,000 to convert a property into six flats, with the intention of selling them and repaying the investors from the proceeds. The developer agrees that there will be a legal charge on the property, stating that the investors must be repaid first when the development comes to market. This is the sort of investment that smaller investors had no chance of making in the past.
But through a crowdfunding site, an investor with £1000 to invest can do so. Other people may decide to put in more. During the term of the investment, a property manager/developer can pay dividends and at the end of the investment term, repays the capital.
In this example, the investor has been able to invest £1,000 secured against property. If the property manager/developer can’t repay, the property will be sold to repay the investors. There isn’t any other way to secure this modest size of loan so securely. So the individual has been able to cut the risk on their investment, in the way that the mortgage companies traditionally have done.
In addition, an investor can decide to spread their investments over several investments and diversify, to further mitigate the risk. They can also put their money into different regions of the country, or different types of property.
The best approach is probably to dip a toe in the water first. You can invest £1000 in property but some sites will even allow you to start with an investment of as little as £100 – Brickowner does this, and you can register below.