theFIREstarter

If you are remotely interested in building wealth and haven’t been living under a rock for the last few years you will no doubt be aware of the huge surge in popularity that crowdfunding has experienced in the last few years. The House Crowd has been at the forefront of this revolution when it comes to real estate crowdfunding, and has changed the way we’ll think about property investing forever.

I’ve been following this company for a good few years now after I first heard about them on The Money Principle Blog. As with most things, I was excited yet slightly skeptical. I had a look at the website and signed up to the newsletter to get a better feel for the properties they were investing in and how the process worked. After about a year of reading up and procrastinating, I decided that they were around to stay and were worth putting in a small part of my portfolio.

Fast forward to a month ago, just after I’d received my first yearly dividend payment, and I actually got the chance to meet up to the head honcho of The House Crowd himself, Frazer Fearnhead. Frazer is an enthusiastic and interesting fellow who likes a vodka martini, exactly what you would expect from a prop-tech entrepreneur 🙂

Having now spoken to Frazer about the company in detail and having been directly investing with The House Crowd for a year now, it’s high time I wrote a post for you guys telling you all about it! When I first came across the company I remember having many questions so rather than just write out a bog standard company bio, I’ve tried to cast my mind back to what I wanted to know back then and write out a FAQ (Frequently Asked Questions) from the point of a virgin investor.

Here it is!

The House Crowd – Virgin Investor FAQ

So The House Crowd… tell me about it?

The House Crowd is actually the first property crowd funding website in the world, and launched in 2012. They’ve been growing at an astonishing rate since then and now have over 1200 investors who have invested in 200 properties.

OK, but what the heck is property crowd funding!?

Property crowdfunding offers an entirely hands-off approach to investing in property, which allows investors to spread their capital – and risk – over a number of properties. Individuals are able to invest as little as £1,000 and, if the right crowdfunding mechanic is chosen, will receive substantial returns on their investment as property prices continue to rise.

Show me the money! What sort of returns can I expect then?

Having kept an eye on the gross yield figures of the properties on offer over the last few years I would say it averages around 9%. However in my first yearly dividend it only came through as about 6.5%. This is because gross yield is not the same as net yield! Net yield is the gross yield minus costs for vacancy, maintenance etc…

There are investments available where the gross yield can be up to 12%, but you normally have to make a large investment to take advantage of that.

How can they offer a fixed return? What about those maintenance costs you just mentioned?

The newer investments tend to be for corporate tenants on long leases where they are responsible for maintenance, so the returns are far more predictable. So if you want a more predictable income then just look out for these deals!

And you mentioned tax. How does that work?

There are in fact two types of investment structures available with The House Crowd:

• Interest paying investments: As these pay interest you can take advantage of the Personal Savings Allowance the government introduced as of April 2016. Anything above the tax free allowance ¹ that will get taxed at your marginal rate.
• Dividend paying investments: Naturally these get taxed as dividends and so you can take advantage of the £5000 allowance which again was bought in at the start of the current tax year. After that you are taxed at your marginal rate for dividends which there is further information on here if you need it.

As each individual situation is different it is hard to say which structure is best for you, personally I am opting for the interest paying investments for now, but there is no reason why I won’t switch to looking at dividend paying ones once I get near to the £1000 tax free allowance. As always DYOS ²

For more information on the different types of investment The House Crowd offer see here.

Woah there… don’t fob me off with links, I’m far too lazy for that! Please summarise the investments available!

Ok ok… On top of the two types of investment return structure on offer as described above, there are three types of investments available, which should be able to accommodate most investors desired risk profile and holding periods:

• Buy to let – You are going for a regular income from rental here with the likely possibility of capital gains when the property is sold. You get a pro-rata share of both! Minimum holding period is typically between two and five years to allow decent capital growth and the yearly returns are variable due to rental and maintenance costs.
• New Builds and Re-developments – Here the idea is that money can be made by developing dilapidated properties or building up new houses. returns here are usually in the region of 10%.
• Secured Loans – These are probably the simplest as you are literally just lending money out at a fixed return usually over 6-12 months to someone who is doing their own property deal. The House Crowd is basically acting as a middleman matching up loaners to loanees. These typically offer 9-12% returns and are over much shorter time scales of 6 to 12 months.

All sounds good so far! So what’s in it for The House Crowd? How do they make money?

I passed this one straight over to Frazer:

In terms of our equity investments we charge a fee to the SPV* on raising the money and a fee for managing the asset (i.e. the property purchased). These vary a little and are stated in the investment pack for each investment.

In terms of debt investments we simply pay investors a fixed net return and we charge the borrower a fee.

*Special Purpose Vehicle – This is basically a Ltd company set up to run each investment

Obtuse question alert: If The House Crowd or the property investors they lend to are so smart why do they need our cash?

This is a bit of a silly question but one I think might cross peoples mind so I’ve rhetorically asked it anyway 🙂

Anyone who knows anything about investing will know that to grow a company they will sometimes need to take on debt, and it’s the same when investing in property or building a property empire. It’s as simple as that really.

If you want a soundbite answer you could just say “Everyone has to start somewhere” – expanding on that, imagine if you saw a brilliant opportunity to buy and rent a property out but you didn’t have £200k burning a hole in your pocket, you would need help funding it (as long as the figures still made sense once taking on the debt burden of course). It’s the same whether you are starting from scratch or already have 10 properties on the books, your additional extra cash laying about could still be next to zero in both cases.

What are the risks of getting involved with crowd funding?

As with all investments your capital is at risk. However remember you are investing in property so your money is backed up by bricks and mortar here. One of the obvious risks to me seemed to be property prices falling, over to Frazer once again to explain about this:

“Most investments are purchased by Special Purpose Vehicles (SPVs) in which investors are shareholders, securing their investment in ownership of the property. If it’s a secured loan then the investment is protected by a legal charge over the property. Property values can fall, and if a property is sold at the wrong time investors may lose money but as there is no debt on the properties then there should not be any pressure to sell at an inopportune time.”

Is investing in property crowd funding a socially responsible way of building my wealth?

When I first heard about property crowd funding, I was very worried I might be buying into slum lord type of investments, and also that my investment money is just chasing fewer houses and pushing up an already frothy market, and making it harder for first time buyers to get on the ladder.

But luckily my fears were ill founded!

I think The House Crowd and similar companies are actually doing a lot of social good in terms of combatting the housing crisis by:

• Breathing life into neglected homes which would otherwise stand empty
• Building new homes via their associated development company

It is worth pointing out that these are not properties (most) first time buyers would be going for either as usually a lot of work is required, so there is nothing to worry about on that point either.

Hopefully that gives you a good grounding into what The House Crowd is all about and how the investment process works, and more importantly answers any questions the inner skeptic may have had! If you have any more, of course ask them below and I will do my best to answer them.

Future prospects…

I’ll finish up with a few more direct questions and answers I asked Frazer to give you more of an idea about what the company is about and where it’s going:

Tell me more about The House Crowd company ethos. It sounds like a fun place to work!

“Yes, we do try and make it fun. We have life size cut outs of staff and clients around the office and lots of funky artwork. Everyone seems to be chocoholics and the treasured delicacy are the handmade brownies from Altrincham market.

People who go above and beyond the call of duty collect Brownie Points (literally). It’s a great (and very cheap) way to motivate staff… though perhaps profiting from their addictions is rather unethical. Still, they don’t seem to be complaining.

After work – I’m doing my best to get everyone hooked on my vodka martinis. Unfortunately, my staff are a bunch of lightweights and can’t handle the results of my mixology skills,  so I always end up drinking them. Shame!”

What are the companies plans for the future?

We are hoping to become a public company, probably on the AIM (Alternative Investment Market) market offering a wide variety of property based investment products. We are in principle big enough to float already, there are already smaller companies than us on AIM.

So is world domination just around the corner!?

Absolutely, I am currently searching for a private tropical island complete with a missile silo hidden in a volcano… though I will have to check with Clarissa first – the cats might not like living somewhere that hot

And there’s more to come!

This is actually the first post in a 12 part series I am going to be writing about The House Crowd!

Full disclosure time: The House Crowd have provided me with £500 to invest in one of their properties so I can write about my experiences with signing up, investing, and general dealings with the company. As I was already an investor anyway and was always planning on writing some posts about them, it seemed like a no brainer to take them up on this offer! 🙂

Here is a teaser of what to expect for the next 11 posts:

• Your first investment with The House Crowd
• The House Crowd vs REITs
• The House Crowd vs Landlording
• The House Crowd vs Other Property tech companies
• What are the risks of crowd funding?
• The House Crowd vs The Dragons Den
• Wrap up of 1 year of investing with The House Crowd

Have you had any experience with investing in The House Crowd or any other property crowd lending platform? Let me know of your experiences in the comments below?