January 22, 2021

How I Lost £3,000 in a Day in Property Crowdfunding (And Lessons Learned From This)

Nick Investing property, crowdfunding 10 Comments

This isn’t an easy post to write, but I like to be honest with readers about my investing failures as well as successes. So here’s the sad story of one failed investment…

How It Happened

About a week before Christmas 2020 I got a cryptic email from the property crowdfunding platform Crowdlords directing me to their website for information about one of my investments. The email didn’t give anything away, but I had a premonition it wasn’t going to be good news.

Anyway, I followed the link to the Crowdlords site and logged in. The update concerned a property development I had invested £3,000 in back in 2016. Originally this was referred to as Seven Eco-Apartments (CL Number Four), but latterly it has been described simply as Kennington Road.

There was a long, involved explanation of what had been going on with the development. But the bottom line was that it had failed completely and investors were going to lose not just some but all of their money.

At first I wasn’t entirely sure I had read this correctly, so I emailed Crowdlords for confirmation. I received a quick reply from Richard Bush, co-founder of Crowdlords. Among other things, he said:

‘Kennington Road is one of two investments (from 72 we’ve completed to date) which have suffered from a very unusual combination of factors – delays, cost overruns, lost sales due to Covid and then further delays getting back to the market only to find the values have dropped. The perfect storm, almost.’

So there it was. At a stroke I had lost £3,000. As you may imagine, I felt pretty sick about this. I have subsequently heard from other people who lost much larger (five-figure) sums on the projects concerned (I’m not sure what the other project was). But that was no consolation, of course. About the only positive thing I can say is that I have had other Crowdlords investments which did deliver the promised returns. But even so, I am well down on my investments via the platform overall.

While it’s tempting to blame Crowdlords for the losses, I accept they are not directly responsible. Clearly they – along with many other businesses – have been the victims of unique and challenging circumstances in 2020. I do, though, think their communications with investors could have been a lot better, especially when it was becoming clear that problems were mounting. While they were quick enough to notify investors about successes – and new projects requiring investment – I couldn’t help feeling that failing projects were being swept quietly under the carpet. To be fair, Crowdlords aren’t the only investment platform I have noticed this with.

I do think it would be a nice gesture if Crowdlords were to offer modest ex-gratia compensation payments from their own profits to investors who have lost all their money. Even a book token would be nice. But realistically, I will be surprised if this happens now.

Lessons Learned

So what lessons have I learned from this experience? I’ll try to sum them up below.

Be a Sceptical Investor

Perhaps I’m stating the obvious here. But when I started investing in property crowdfunding it was pretty new and I found the concept intriguing and exciting. At that point, of course, there hadn’t been any failures to take the shine off. Plus I had recently come into some money through an inheritance and was looking for interesting and profitable ways to invest it.

Looking back now, I can see that I was a bit too ready to buy into the property crowdfunding idea, and put too much faith (and money) in it. I am not saying property crowdfunding can’t work (many of my investments did pay off). Nowadays, however, I am a lot more sceptical when assessing such projects and the claims made about them by their promoters.

It’s important to remember that property crowdfunding platforms are all in business to make a profit. To put it bluntly, they make their money by persuading potential investors to part with theirs.

There is nothing automatically wrong about that – all businesses do it – but it’s essential to examine any potential investment carefully and objectively before opening your wallet. That includes ensuring you understand exactly what the project entails and what the risks for investors are. Which brings me neatly to my second lesson…

Know What You are Getting Into

Property crowdfunding investment opportunities take many different forms.

In ‘traditional’ property crowdfunding a group of investors jointly purchase a property. They then receive rental income pro rata to their investment and a share of any profits when the property concerned is sold. With this type of investment, your money is effectively secured by bricks and mortar, so you are unlikely to lose your shirt. On the other hand, problems (from bad tenants to fire or flood) can arise leading to lower rental income than anticipated and/or delays in selling up. And obviously, if the value of the property doesn’t rise, you may not get all your capital back, let alone any profit on sale.

Development projects, which may launch with no more than a set of architect’s plans, are even riskier. If you invest in a development project (such as Kennington Road), while you may ultimately make a bigger profit, there is a real risk of the project failing completely for any number of reasons. In this case (as I discovered) you risk losing your entire investment sum.

Finally, there are platforms such as Kuflink that allow people to invest in loans secured against property (including bridging loans). If such loans are not repaid, the property can be sold to pay off the debt, so again you shouldn’t lose your entire investment. But even so, the legal processes involved can be time-consuming and expensive; and again you may end up losing some of your capital after all costs are paid off. And even if it doesn’t go that far, there are quite often delays in repaying loans (especially at the moment) meaning you don’t get your money back when you expect it.

So my second lesson is to be very clear what type of property crowdfunding you are investing in and what the risks are. And be especially cautious about investing in development projects, which are by nature more speculative and carry a greater risk of losing all your money.

Spread the Risk

This is of course an important principle in all investing but one that applies especially to property crowdfunding.

If you invest £3,000 in one project (as I did with Kennington Road) unless you’re Bill Gates that’s putting a lot of eggs in one basket. When I started in property crowdfunding I put as much as £5,000 into a single project. That is definitely not something I would do any more.

I am not investing as much in property crowdfunding as I did originally, but where I am still doing it I generally put no more than £100 into a single project. If I lose that money in a worst-case scenario, obviously that is not going to hit my finances nearly as hard. My approach nowadays is to have larger numbers of small investments spread across multiple platforms. This spreads the risk while still giving me control over what I invest in.

It’s interesting to note that most of the remaining property crowdfunding platforms (some have gone to the wall or are no longer serving private investors) also now offer some form of shared investment with automatic diversification. An example mentioned earlier is Kuflink, who offer an ‘Auto-Invest’ account paying up to 7% interest per year. Investments are automatically spread across a wide range of projects on the platform. If you want an easy way to diversify your property crowdfunding investments, this approach has some merit. Personally I prefer to build a diversified portfolio myself (which you can also do with Kuflink), but the automated approach is worth considering if you don’t have the time or inclination for that.

• If you want to make use of your ISA allowance with Kuflink, you will need to open an Auto-Invest IFISA with them. You can’t create an ISA and choose your own investments, for reasons I’m not clear about.

Remember the Big Picture

Finally, it’s important always to remember that property crowdfunding is just one way of investing your money. It is also – as I have indicated – a relatively high-risk one.

So if you are going to include property crowdfunding investments in your overall portfolio, it should only comprise a fairly small part of it – I suggest no more than 10 percent. The rest of your money can then be spread across a variety of other investment types to provide good diversification. And as I have noted before, you should also have at least three months’ of income in easily accessible form in case of sudden, unexpected emergencies.

When I first started in property crowdfunding I made the mistake of putting about a third of my money into this type of investment. I am down to around 20% now, which is still (in my view) too much, but some money is tied up in long-term projects where an exit currently looks some way off. But at least hopefully there won’t be any more complete write-offs now.

Closing Thoughts

So that is the story of my failed £3,000 property crowdfunding investment and the lessons I have learned from it.

I am trying to be philosophical and remember that many of my other property crowdfunding investments have made money for me. Nonetheless, in retrospect I wish I had taken a more cautious approach initially. If I had simply put all the money into my Nutmeg stocks and shares ISA, for example, I don’t doubt that financially I would be better off overall.

Nonetheless, I do still believe in the property crowdfunding concept and am happy to have some money still in it. As I’ve said before in Pounds and Sense, property is relatively less affected by ups and downs in the economy than stocks and shares. Property investments don’t provide a method for hedging your equity investments directly, but they do offer an extra element of diversification and spreading of your financial risks. And alright, I will admit that a part of me does rather enjoy (for example) having a small amount invested in student accommodation in Leicester, my old university city 🙂

As always, if you have any comments or questions about this post, please do leave them below.

Disclaimer: Please be aware that I am not a qualified financial adviser and nothing in this blog post should be construed as personal financial advice. You should always do your own ‘due diligence’ before investing and seek professional advice if in any doubt how best to proceed. All investing carries a risk of loss.