Modest Money recently received a press release about a UK start-up, purporting to be the world’s first combined property investment and crowdfunding company, gaining over 2M from small investors in just over a year. We spoke to the company’s founder Frazer Fearnhead to find out more. Check out the full interview below.
In one sentence: what is the House Crowd?
The smarter way to invest in property.
Where did the idea for it come from?
It came partly from the fact that it was becoming increasingly difficult for those who wanted to invest in property to raise the required deposits or get mortgages and partly because I have seen how the bank use onerous terms in the small print to destroy people lives. I wanted to create an alternative for people who would rather avoid banks and avoid getting into further debt.
What makes it different from other investment opportunities?
We were the first company in the world to combine the power of crowd funding with property investment. We offer a transparent way people can group together with like minded individuals and invest in individual properties free of debt and still make an excellent return secured by bricks and mortar.
Who is your typical house crowd investor?
I am proud to say our investors span the entire social spectrum from manual workers, train drivers, teachers, business owners, solicitors, retirees looking for a better retirement income and a surprisingly large number of bankers. It’s open to everyone who recognises property as a solid vehicle for investment. The average investment in a project is £3750 and we have people who have invested just £1000 but many who now invest in everything we do. A growing number of people have now invested over £100,000 each.
Cynics may say it’s a Ponzi scheme: what would you say to that?
A Ponzi scheme pays out previous investors by continually raising more money from new investors. Our model pays dividends from the rental proceeds from the properties we have bought. It’s a simple model. As an added protection for investors, all funds we collect are paid to a solicitor’s regulated client account and used to purchase physical properties. Investors get full access to everything – all legal contracts, pictures of refurbishment works, tenancy agreements, book keeping records and end of year accounts and a copy of the Land Registry Title. It would be impossible to both use investors funds to buy properties (registered free of debt) at the land registry and use those same funds to pay out future investors in a Ponzi scheme. It’s therefore not something any intelligent person who understands our business model would accuse us of. If you want a true Ponzi scheme, take a look at the state pension scheme.
How does it work?
We raise money to buy a property from members of our investor group. Minimum investment is £1000. And each £1000 buys a share in a limited company (SPV). That usually takes 2-3 days to raise the money. Each property is purchased by a separate SPV and the investment ring fenced to protect investors. At present everything is done on a joint venture basis with a 50/50 profit share. We pay a minimum dividend of 6% a year to investors whilst we own the property. Investors are free to sell their shares at any time but will only profit from any capital growth if they wait for the property to be sold.
Who can invest with The House Crowd?
Individuals from most countries including the USA or Limited Companies
What track record do your team have of picking the right investment properties?
I personally have helped investors purchase over £60M of investment property over the last 10 years. A far as The House Crowd goes, we have bought 43 properties in the last 18 months and they are producing an average yield of 11% which is way above the national average. I think that speaks for itself.
All investments carry risk, how high is it with the house crowd?
If the House Crowd itself was to go bust, investors money is ring fenced and secured by shares in a SPV which owns a specific property outright. Investors have the legal right to the rental income and a share of profit. Investors also have a share in an asset (i.e. in the company that owns the property). The biggest risk is, therefore, if the housing market completely collapsed and the property value fell to less than we paid for it. This is a possibility, but we think it’s unlikely. We are buying at a time when prices are low and we are buying properties (repossessions and distressed sales) which are well below their current open market value. Prices would have to fall a long way to wipe out the profit margin. In any event, if that did happen, the property would simply be rented out until the market recovered and investors would still receive the fixed net return on your their investment in the meantime. Each investment prospectus we send out contains a full risk assessment.
From an initial investment, how long before an investor sees a return?
12 months at present, Soon to be 6 months.
What protection does an investor have?
All money is sent to a regulated solicitors account until a suitable property is purchased. Thereafter investors money is ring fenced and secured by shares in a SPV which owns a specific property outright. Their protection is in bricks and mortar.
Why are crowdfunding companies like yours not registered with the Financial Controls Authority in the UK?
Let me turn that question around. Why should they be? Neither the FCA nor any other body has any moral right to interfere with what people choose to do with their money. We are all adults, supposedly equal under the law, so how can one group justifiably seek to impose their beliefs over another (much larger) group in circumstances where there are clearly no victims. We as human beings all need to take full responsibility for our own actions. People have a clear and obvious choice. They can choose to invest in regulated investments. Or they can choose to invest in unregulated investments… or to give their money to charity, bet on sports, leave it in a bank account losing value every day or waste it, if they so choose, on unnecessary consumer goods. There are existing laws to protect people from fraud and dishonesty so as long as an organisation is transparent and honest in its dealings, making clear what the risks and rewards are the FCA has no business interfering. The beauty of crowd funding is that it is regulated by “the crowd”. There are plenty of internet forums out there with people keen to relay their experiences. No company without a good reputation will survive for long. Investors simply don’t need protection from the FCA. From a practical perspective the costs of becoming regulated are prohibitive and investors would not get the returns they can expect from crowd funding which operates without the middle men and regulator creaming off their (considerable) slice. You might have come to the conclusion that this subject makes me rather angry. You’d be right.
You’ve recently raised 2m in investment, where do you see The House Crowd going from here?
The amount we have raised is now close to £3m. We are raising around £30,000 a day now so expect that to pass £6M within the next 6 months. We have been approached by a number of angel investors who want to invest and help take the company to the next level. We are currently considering our options. In terms of company development we will be recruiting around 7 new staff members, developing the website to a much more sophisticated platform streamlining what we do and enhancing the experience and benefits for investors and hugely increasing the range of investments and geographical areas we offer.