The processes of due diligence in property crowdfunding

How do you know which crowdfunding platform to choose?

In a nutshell

In the world of Alternative Finance, as we've seen in previous articles about P2P lending and Property Crowdfunding, both markets are gaining a staggering level of momentum with investors.

Equally, however, in the article "How Safe Is Property Investment?", we have also looked at the risks involved, and how being aware of the different investment categories can help to mitigate these risks.

But crucially, when balancing the risks with the potential returns, how can you dig even deeper to further increase the probability that you'll invest judiciously?

Asking yourself the right questions

Before choosing specific projects for your investment portfolio, there are a number of things to consider. By following some simple processes of due diligence, you can gain confidence and learn more about how to invest assuredly.

We recommend that you choose your investment opportunities based on a logical combination of targets, historical performance, and sector risk. This combined information will help you to make an informed choice as how best to proceed. It is vital to be informed, make decisions logically, and to always ask yourself what you want to achieve by investing in Property Crowdfunding.

Having set out your personal goals and financial ambitions, you are then in a better position to establish how you want to invest your capital, and perhaps more importantly, whether Property Crowdfunding is right for you and, if so, which Property Crowdfunding platform you wish to use.

What should you look for on a Property Crowdfunding platform?

Firstly, it's a good idea to research a number of different Property Crowdfunding platforms to get a general feel of the specifics each one offers.

Although most platforms will offer you the same types of products, it is the way in which the platforms operate that distinguishes one from the other. By visiting different platforms, you can begin to gauge which Property Crowdfunding business you feel most comfortable with, sometimes just because of small details like how accessible and clear the platform is, or the response you get when you make an enquiry.

If you're immediately saturated with jargon and niche information that is unfamiliar to you, you may well be turned off and look elsewhere. Trust is of paramount importance when investing, so the first step of due diligence is to reassure yourself that you are comfortable with the platform.

Another factor to consider is transparency. As with many nascent industries, there are companies within the sector which do not take customer protection or investors' wellbeing as seriously as others. However, some crowdfunding platforms may offer returns which seem to be either too high or too low when compared to others, but this may not be a red flag, it could be that their structure is different, and the returns might well be appropriate.

When contacting the platforms, it is also wise to ask about the investment processes or check whether there is a section on the team behind the platform. Who is involved in the decisions of the investment committee? How much experience does the team have, and according to the forums and online feedback comments, what is their general reputation?

Under Section 4.2 of the Financial Conduct Authority Handbook, "a firm must ensure that a communication or a financial promotion is fair, clear and not misleading", but there is a consensus that not all Property Crowdfunding platforms are following this ethos in regard to their own due diligence processes.

Once you have reassured yourself with the transparency of a platform, there are the investment specifics to analyse.

Are you satisfied with how investments are carried out?

Try to familiarise yourself with the types of investments offered by the platform. Knowing the difference between whether the opportunities are debt-based investments or equity-based investments is fundamental, as they offer very different levels of risk in comparison to potential returns. Depending on your personal risk appetite, it's important to do some research to decide which category is right for your circumstances.

It's also a good idea to find out whether loans on the platform are only secured by property assets, or whether there is any additional security, like Personal or Corporate Guarantees. You should also check the order in which lenders and investors are repaid should the loan default or should profits be less than planned.

When will you see your returns?

This is possibly the most important question, as potential returns are usually the attraction when you decide to invest!

You should attempt to find out what proportion of returns are actually paid out on time or whether capital has been tied up for a significant period.

Again, by reading online comments and going on forums, you can form a sound opinion of individual platforms judging by the frustrations of its clients.

Anything else to consider?

Many other factors can influence the success of your investments in Property Crowdfunding. Other important things to consider relate to the local property market where your chosen project is situated.

If, for example, there are a number of four bedroom new-builds with a very high estimated market valuation, but after researching the local area, your studies show that it is located in an overwhelmingly student area, you could be forgiven for choosing not to invest.

You might also try to find out employment rates, as well as looking into the regeneration of the local area as a whole.

At CrowdLords, we complete all of these due diligence checks before the property investment opportunity is approved and offered to you, therefore removing a large chunk of work for you to do from the start! We also make any reports we commission available on request to ensure that you are fully informed before you decide to invest.

Property Crowdfunding will always come with a certain amount of risk involved, but these risks can be significantly reduced simply by ensuring that you are well informed, and by taking on board the responsibility of some quick due diligence processes.

Choosing the right platform, as well as the right type of investment, depending on your personal and financial situations is ultimately your responsibility, and though many platforms will vie for your custom, it comes down to your informed judgement and your desire to know everything there is to know about where your capital is being invested.

The disciplined and transparent platforms prioritising mutual trust are the ones that are proving to be successful as they are delivering projected returns on a consistent basis, based on market variables.

Platforms that choose to operate on the edge, by attempting to hoodwink prospective investors in order to make a quick buck are to be avoided at all costs, and are the ones most likely to fail.

Property Crowdfunding projects can be amazing opportunities, but the higher the rewards, generally, the higher the risk. Educate yourself, speak to the team at your chosen Property Crowdfunding company, attend events, learn about historical performance, and then decide.