Crowdfunding is a great way to broaden your investment portfolio, with a relatively small amount of money and experience, particularly when it comes to property.
Of course, like any form of investment, it’s important to consider the key risks, before you commit to invest your hard-earned cash. When it comes to crowdfunding, although there are a number of different investment options available, they mainly fall within either Equity Crowdfunding or Peer-to-Peer Crowdfunding.
If you would like to know more about crowdfunding investments or you are wondering how to invest through a property crowdfunding company, the first thing to decide is whether Peer to Peer lending or Equity crowdfunding investment is right for you.
Let’s take a look at both types of crowdfunding and the advantages and disadvantages that each offers…
Peer to Peer (P2P) Crowdfunding
Also known as Debt Crowdfunding, or Debt Lending, Peer to Peer lending involves lending money to a company or project, rather than buying equity in it.
Your funds will be lent to a borrower for a fixed term and interest rate. Interest will either be rolled up and paid at the end of the loan term or paid quarterly depending on the structure. These types of investments are generally prior to development works taking place.
The advantages of Peer to Peer
Debt crowdfunding is relatively low risk as your capital is loaned for a fixed term and rate. Further to this your capital will most usually be secured by a charge on the project asset, whether it may be land or property. Should there be an issue in repaying your capital, the P2P platform will be able to force a sale of the asset in order to recoup any capital or interest outstanding.
Another significant advantage of investing through peer to peer (debt) investments is that you can invest using your ISA or IFISA and take advantage of tax breaks.
The disadvantages of Peer to Peer
P2P crowdfunding is generally lower risk which corresponds with lower returns compared to equity investments. Returns for debt crowdfunding falling range between 5% and 9% per annum on average. You will also have little say over how your loan is spent by the borrower you are lending to. Although you receive a fixed return, you do not benefit from any of the additional upside should the project outperform expectations.
Equity Crowdfunding is where people invest in an unlisted company or project in exchange for equity in that project or company. In other words, money is exchanged for shares or a small stake in a business or project, meaning investors get their returns through profits, or dividends.
Once reserved for the fortunate few, this type of crowdfunding is now opening up equity investment opportunities to everyone, particularly when it comes to property investment.
The advantages of Equity Crowdfunding
This type of crowdfunding can offer significantly higher levels of returns. In fact, the average annual returns for Equity Crowdfunding are between 15% and 25% per annum compared to the returns of between 0.5% and 3% you can expect to receive if you leave your money sitting in a bank account.
The disadvantages of Equity Crowdfunding
Equity funding can present a higher level of risk, as your returns are not guaranteed. It is also worth bearing in mind that, if you invest in an un-established business or a start-up, there’s always the possibility that the company will fail.
However, with the average returns for Equity investments being between 15% and 25% per annum, these investments will compliment a well-diversified portfolio.
The bottom line….
Any type of investment comes with elements of risk, as well as rewards. The key to deciding how to invest in property through crowdfunding is balancing the risks and the rewards. So, for example, if you are willing to take a slightly higher risk, you can reap significantly higher returns through Equity Crowdfunding.
At Shojin Property Partners, we are proud to be one of the UK’s best property crowdfunding companies, offering a host of property crowdfunding opportunities across the UK and beyond.
Shojin offer investors the opportunity to invest across the entire property sector from buy to let investments all the way through to property development. These projects span across the debt and equity options and allow investors the opportunity to decide which property investment is suitable for their needs. Click the link to find out more about our property investment products.