Small investors attracted to the idea of crowd funding property developments should approach with caution, according to property development advisory firm, Development Finance Partners (DFP).
DFP Managing Director, Baxter Gamble, says low interest rates are driving many people to invest in propositions they don’t understand and which may or may not deliver the indicated returns.
“When a bank pays just 3% or less on a 12-month term deposit, a return of between five and 14 per cent is hugely appealing, particularly given the apparent simplicity of parting with your money – a click is all it takes,” said Mr Gamble.
“However, would-be investors would do well to ask some basic questions – for instance:
If I invest do you or does some entity take a percentage as an initial fee?
Is the rate of return guaranteed – if not, what can affect the return?
How long will I wait for any return?
How often do you report on progress?
If I am investing in a development, who ensures that developers are doing what they say they are going to do with my money?
What percentage of your projects have failed to deliver a return or have actually meant that the full amount invested was not returned?”
“Some crowd funding offers are essentially asking people to invest in contributory mortgage schemes which appear unregulated. Investors are not genuinely investing in real estate but into equity schemes.
“Clearly, some crowd funding groups have excellent governance, strong boards of directors and experienced management. But, if those basics are difficult to uncover, then it might be smart for an unsophisticated investor to be very cautious."Mr Gamble says any offer that suggests your money will only ever be invested in successful schemes should ring an alarm bell. Property development can be notoriously unpredictable, particularly if the developers or managers lack experience or cannot demonstrate a track record of success.
“Crowd funding does have a place in the modern world. But, the complexities of real estate, particularly developments, require oversight by experts in quantity surveying, financing, demographics, the supply chain and project management, among others.
“If any of those appear missing, investors should ask questions before committing to the simple online click which may see their money disappear,” Mr Gamble added.
