10 questions to ask before choosing a property crowdfunding investment platform
Deciding which platform to invest with is a big decision
With so many property crowdfunding platforms now available, it’s always good to ask the right questions and find out a little more, before making your first step into investing and trusting a company with your hard-earned money. We’ve pulled together 10 of the questions we feel it’s most important to have the answers to before making a decision.
1. Is it FCA authorised?
As a first step, make sure the company/platform is authorised and regulated by the Financial Conduct Authority (FCA) to provide the service they are offering, either directly or via an Appointed Representative. The FCA regulates 59,000 financial services firms and financial markets in the UK, making sure they operate in a fair, transparent and effective manner, to ensure consumers are treated with integrity. Whilst being FCA regulated doesn’t guarantee a firm will operate in accordance with the regulator’s rules, it’s best to avoid all platforms that do not fall in some way under its regime.
2. How much risk do I want to take?
Investments all carry varying levels of risk. Before investing, it’s important you fully understand what’s at stake and weigh this up against your personal risk tolerance. Property is typically an illiquid investment which means you can’t sell it in a matter of hours or days (like many stocks or bonds), but it comes with an illiquidity premium which means you typically get higher returns. You need to make sure the investment term, in other words how long your money will be tied up for, is appropriate for your lifestyle. On the flip side, being a physical asset increases the investment security as it will always retain some level of value, unlike say a stock which can go to zero.
3. What do I know about the platform I am investing with?
It’s always advisable to learn more about the people behind a platform and their expertise, before entrusting them with your own funds. Make sure they have a strong and demonstrable track record in property and investment markets. It’s important to analyse the previous investments that have been made on the platform and how they have performed (Although you shouldn’t rely on past performance alone as it doesn’t guarantee future results). Make sure the company’s loan book is strong and has no delays or defaults. Always ask what’s at stake for the company should an investment go sour – will it only suffer reputationally, or also financially? If management are willing to put their money where their mouth is and invest alongside the crowd, that’s a strong demonstration of confidence.
4. What do other people say about the company?
It’s easy for any company to tell you that they’re great, but what do those independent from it think? Most online businesses are rated on independent review platforms, where customers share honest, impartial feedback on their experiences. Make sure an investment platform has enough reviews and holds at least a four-star rating. It’s always sensible to check for any additional reviews that come up on Google, as well as to see what the media thinks of the business, if anything. If the company doesn’t allow customer reviews, it’s better to steer clear.
5. How good is the customer service?
With many online investment platforms, the communication is done predominantly via their website and emails. However, as no two investors are alike, it’s highly recommended that you find a platform that offers live online chats and/or phone calls with their investor relations team as part of their standard service, so that no question is left unanswered before making an investment decision. If you can’t speak to a human representative of the company, or the person you do speak to does not know their subject and lacks in professionalism, this doesn’t bode well for the platform.
6. How secure is my investment?
There are many different crowdfunding platforms in the UK offering investments in different assets, such as shares, unsecured loans and secured loans. Each type of asset has a different risk profile and you should familiarise yourself with the product before investing. Some assets, such as unsecured loans, may offer higher rates of return, but carry higher levels of risk as in the event of a borrower being unable to repay a loan it is unlikely that there is any money to repay investors. Investing in Loans that are secured by a charge over an asset, such as property, give investors some recourse to the value of the underlying asset should anything go wrong and mean that investors will be repaid ahead of any unsecured creditors. However, no security is a guarantee that you will receive all or any of your returns and capital.
7. Have I done all my due diligence?
Every investment opportunity listed on a platform should offer some level of due diligence behind it; the more detailed the better. How extensive this information is and the expertise of the team that produced it are key indicators of the quality of both an investment platform and its underlying assets. You should also run your own due diligence based on your personal investment criteria before proceeding.
8. Can I invest tax-efficiently?
With investments of up to £20,000, you may be able to utilise your tax-free ISA allowance. Make sure your chosen platform offers Innovative Finance ISA investments, which allow investors to protect returns from both income tax and capital gains tax. Also make sure you fully understand the type of investment you are making via an Innovative Finance ISA as they are generally higher risk and may not be protected by the Financial Services Compensation Scheme.
9. What fees am I being charged?
As we all know, fees will eat away at your overall returns potential. Make sure you’re clear on how a platform generates revenue and exactly what fees the platform charges to investors. For example, if the headline rate of return is forecast to be 8% per year, but the platform charges you 1.5% per year, you are only making a 6.5% net return, which is significantly less attractive. Choose platforms that are completely transparent on fees and where they exist are as low as possible. Make sure the net return to you is clearly communicated and fees are not hidden away in small print.
10. Can I build a diversified portfolio?
Diversifying your portfolio might mean investing across different platforms and asset classes, so after selecting your preferred platforms, it’s time to build out your portfolio. Always look to spread your risk by investing your capital across several deals, potentially with different maturity dates to stagger timing of your returns. In terms of property development investments, you can choose different levels of risk (i.e. preferred equity – most risk; mezzanine loans – medium risk; and senior loans – low risk), locations (i.e. UK regions vs London) and type of asset (residential/commercial/mixed-use). Some platforms will allow you to review and select your investments on a project by project basis, meaning you’re not investing into a blind pool where you have no visibility on what assets they are putting your money into.
Ask a professional if you’re unsure. As always, if you’re unsure about anything, before making a financial decision you should talk to a professional independent financial adviser. The content of this blog post is not intended to be a substitute for professional investment advice. This post sets out personal opinions which are not capable of being applied universally; following them will not guarantee success.
Capital is at risk & interest payments are not guaranteed. Past performance and forecasts are not reliable indicators of future performance. There are no recognised markets for these types of investment. Tax rules and allowances depend on your circumstances and may change. IFISAs and Cash ISAs are not comparable products. Investments held in IFISAs are generally high-risk with limited or no cover by the Financial Services Compensation Scheme. Please carefully consider this type of product before you proceed as you could lose the money you invest.