Frazer Fearnhead, founder and CEO of The House Crowd, explains how he turned frustration with the banks into a multi-million pound idea:
The idea for The House Crowd was sparked almost entirely from frustration.
It was 2011, and I’d hit hard times thanks to the 2008 financial crisis. A time when many people were struggling due to the banks’ greed.
I’d left my career as a music industry lawyer to go into property full time. And why not? It stood out as one of the simplest and most rewarding investment options around. However, there was one huge problem: accessibility.
Two years after the financial crisis, there were plenty of opportunities to invest, but it was proving impossible for normal people to receive the finance to get back in the game.
Suddenly the answer was obvious: why not cut out the banks, crowding people together to invest and share the profits?
Solicitors told us it wasn’t possible, as crowdfunding was prohibited by the Financial Services and Markets Act. As a former lawyer, I know most solicitors only tell you what the law is, not how to achieve your aims, so I decided to investigate it myself.
I found a narrow exception within the act, which allowed us to legally publicise each investment to a maximum of 150 people. With some clever structuring of how we marketed each proposition, we launched The House Crowd, the world’s first property crowdfunding platform, in March 2012.
Building a New Investment Class
Our first crowdfunded property was £40,000. It took us two weeks to raise that sum from 28 investors. We now raise several million pounds a month and fund much needed new housing.
Scepticism was, and is, a major challenge for us. Property crowdfunding isn’t recognised as a mainstream investment, and most people aren’t aware that it exists. Building our investor database has been tough, and there’s a lot of educating to be done, but we now have an exceptionally loyal customer base that is growing all the time.
When we started, the property crowdfunding industry simply didn’t exist. There was the option of trying to get permission from the FCA, but I didn’t see the point initially. Existing laws protect against fraud and theft, and with the proliferation of consumer reviews and online information, the ‘crowd’ largely regulates itself. However, a recent surge in popularity of crowdfunding platforms now means all operators must be FCA regulated. Given the number of internet scams today, I see why the time investment is necessary. It’s even desirable if it can differentiate between ethical and unethical operators.
Our business model is very simple: we follow tried and tested ways of investing in property. The only difference is that we have a mechanism to allow lots of people to participate, rather than just a handful of large individual investors. I believe this is the most sustainable property crowdfunding model.
Property Crowdfunding in 2017
As traditional buy to let landlords are hit with a barrage of stifling new legislation, property crowdfunding has never been more relevant as an investment class.
We’d never tried to appeal to existing landlords before 2015. We didn’t see why they would relinquish the control and profit levels they could achieve alone in favour of a passive investment.
However, the government has now turned its back on the people it encouraged to invest in buy to lets, switching its allegiance to the private rental sector. Significant changes have been made to buy to let regulation and the way that rental income is taxed, making it harder for ordinary people to turn a decent profit. Property remains one of the strongest asset classes, and it’s deeply unfair to shut smaller investors out when cost of living is rising and they need to be savvier with their savings than ever. The result is unsurprising – we’re seeing more disillusioned landlords selling up and investing through us instead.
The threat of rising inflation, stagnating wages and resulting slow house price growth should also change how people view property investment. Achieving frequent yields or fixed returns from debt-based investments should take precedence over speculative capital growth. This means investing in areas in the North, like Manchester and Sheffield, where rental yields are high and devolution of power is creating opportunities. It’s also wise to spread risk across different projects, including both longer and shorter term investments – such as equity crowdfunding and peer to peer secured loans – in multiple areas.
The introduction of the innovative finance ISA, and general growth of the industry, means we expect crowdfunding will become a recognised investment product in the next few years. Massolution has forecast that industry will be worth $250billion by the end of 2020.
I hope the same frustration that created The House Crowd inspires normal people to stop relying on traditional institutions, and manage their own wealth. That, for me, is what property crowdfunding is all about.
Frazer’s new book ‘The Alternative Guide To Property Investment: How To Build Your Property Portfolio Via The New Crowdfunding Platforms,’ is released on Monday 24th April. Follow this Amazon link to purchase a reduced price copy on release date.