Property crowdfunding is a huge risk for buy to let investors, consumer watchdogs have warned.

Crowdfunding occurs when a group of investors join forces to pool funds in purchasing a house in multiple occupation (HMO) or a buy-to-let property.

In most cases the investors will buy shares in a company, that is in effect, the owner of the property. Once this has been established they then typically share profits and costs whilst making sure, that a certain amount of their earnings are paid to the crowdfunders who look after the project.

Recently the FCA (Financial Conduct Authority) issued a stark warning that crowdfunding of properties to rent within the PRS, was attracting inexperienced investors who were losing money. Within a week the CML (Council of Mortgage Lenders) took steps to warn potential investors to be very wary of crowdfunding projects.

The FCA is calling for much tougher rules to be introduced for crowdfunding, which has rocketed by 175% to be worth £1.3 billion within twelve months.

The Council of Mortgage Lenders backs up the warning from the Royal Institution of Chartered Surveyors, that investors should closely study any crowdfunded ventures being touted by investment firms, as house prices have been rising ever since the sector appeared.

A CML spokesman said: “We don’t know what effect a falling market will have on investments.

“If investors are shareholders in a company, they are liable for debts as well as profits and if the value of a property falls below the purchase price they need to have an exit route planned.”

It is generally accepted by both bodies, that crowdfunding does offer a way into property investments for those who do not have sufficient funds for their own buy-to-let; however it does also highlight the risk that these investors will have limited funds.

The CML spokesman commented: “How a downturn might affect crowdfunding is yet to be seen. The risk is someone on a tight budget could lose more than they expected.”

The CML and the FCA both agree that some crowfunding firms are prone to embellishing the profit figures by leaving out the information about potential maintenance costs, coping with non-rental periods, liability for tax on any dividends and tax on profit made when selling the property.
The spokesman added:  “Prospective investors need to read their contracts carefully because we are concerned that some of these firms are dressing up their investment packages without bringing all the financial information about risk and charges before the eyes of investors.”