You Could Save caught up with Frazer Fearnhead who created the worldâs first property crowdfunding platform, The House Crowd, to find out how it works, and what are the risks and returns of joining the property âcrowdâ.
What is The House Crowd?
The House Crowd is a property crowd funding platform that allows anyone to start building a hands free property portfolio from just ÂŁ1000.
What inspired its creation? I was inspired to create the company back in 2011 as I was working with a number of cash rich investors and helping them pick up property investments at low prices. But many people who wanted to invest could not so as they either didnât have large deposits or couldn’t get mortgages.
Crowdfunding and property: a good âfitâ?
I think itâs perfect. Itâs an asset class many people would like to invest in but have normally been prohibited from doing so by the high barriers to entry. Crowd funding has democratized the process and allowed a much broader range of people to benefit from the rental returns and capital growth that property can bring. It is not surprising many VCs are now backing property crowd funding companies as they see it developing into a multi billion pound industry.
How do people become investors?
They simply need to register on our site and certify that they fall into one of 3 categories 1) a sophisticated investor, 2) high net worth individual or 3) that they are a retail investor who understands the risks and will not invest more than10% of their net assets.
The biggest risks for investors in The House Crowd?
Each investment is ring fenced in an SPV so should the main company stop trading for any reason each investment can continue unhindered.Â So in terms of the risks to the property they are ultimately the same as investing in property as an individual. For example, the property could be burnt to the ground. But you would expect the insurance to pay for it to be rebuilt and cover lost rental income.Â The biggest risk is, therefore, if the housing market completely collapsed and the property value fell to less than we paid for it. This is a possibility. And investors should determine for themselves how likely they believe that is and whether they are comfortable with the risk.
I would add that we do what we can to reduce the risk of that happening as we are experts in our field and we are buying properties at very keen prices and then adding value through refurbishment. Prices would have to fall a long way to wipe out the profit margin.Â In any event, if that did happen, the property would in all probability be able to be rented out until the market recovered and you would still receive your share of the rental income in the meantime.Â Each investment proposal we send contains a full risk assessment.
One of the main benefits of crowd funding of course is that you are able to spread your money and your risk over a number of different properties, thus mitigating the usual risks of property investment where you are putting a large number of eggs in one basket.
Whatâs your process of choosing properties?
In respect of the majority of the properties we offer, we focus on cash flow and the rental income the properties will produce. We inevitably add value to the properties by refurbishing them but we view most of the investments as medium to long term buy to let propositions. Capital gains if they occur are welcome but market conditions are beyond our control, which is why we focus on cash flow. That said we do, when appropriate, occasionally offer short-term buy to sell deals.
Why should people trust you to spot the best investment properties?
Both my partner and I have over 20 years experience in property investing and I have helped investors buy over ÂŁ50M worth of investment property since 2005. We know what we are doing.
But in any event, we provide full information about each property so investors can determine for themselves whether they believe it is a good investment. Everyone has different criteria.
How many houses have been bought to date?
132 so far via The House Crowd Platform.
How much money has been invested to date?
ÂŁ10,450,000 and all dividends due have been paid out on time and in full.
Whatâs the average return for investors per annum?
6.75% after deducting our profit shareâŠ plus any capital growth that has been achieved through renovation and / or a rising market.
There are companies with similar offerings: what makes you different?
Firstly, our level of experience. We were the first company in the world to create a property crowd funding platform and we are quite simply streets ahead of the competition.
Secondly, by focusing on where we are based, the North West (where the yields are amongst the highest in the country), we have built up an enviable database of contacts who know we can act quickly and deliver on what we say we will do. Because of this we are able to cherry pick the best deals often before they even come to market. Thus the returns we are able to offer are substantially higher than our competitors.
Thirdly, we are property entrepreneurs, having invested in property ourselves for many years and also worked with wealthy investors for over a decade to source investment properties. Most of our competitors are inexperienced in this field having largely come from a corporate background. We have a much greater understanding of what makes a good solid investment, how to market it and, vitally, how to manage it to ensure the investors receive their dividends. It is all very well providing estimated returns.
Delivering them is another thing altogether. Property is, as they will discover, a lot harder to manage than a share portfolio. We have paid every dividend due on time in full for 3 years. Nobody else can (yet) say the same.
Why should people invest with you, and not other asset classes?
Most people recognize that property is one of the most best investments you can make and would like to have some property investment as part of their portfolio, except perhaps Merryn Somerset Webb (editor of Money Week), who seems to have a great dislike of property as an asset class. If they want to include property in their investment portfolio, then we offer them a solution to earn excellent returns â better returns in fact than many landlords earn themselvesâŠ and without the hassle of looking after properties and managing tenants.
Are you regulated or registered with the FCA?
Yes, authorized and regulated.
Whatâs the future for The House Crowd?
We have started to buy whole blocks of flats and are gradually moving to bigger and bigger projects. This year we have started to develop â turning houses into flats – and will be progressing to larger sized conversion projects eg offices or pubs into flats later in the year. We are also looking to buy land and start building houses with the intention of letting them long term. As far as fundraising goes, we forecast we will be generating over ÂŁ100M a year within 3 years.