There has been a lot of interest in crowd funding given the recent number of Internet based platforms that have set up with the sole purpose of pooling smaller investor capital into larger property projects. And many of my clients are asking if this is the best way to invest in property going forward. 

Crowd funding has traditionally been a funding mechanism for funding much smaller projects and small businesses. Increasingly, some investors are now using this as a way to get access to investment property for a fraction of the purchase price (some platforms allow as little as usd$100 per investor), and can provide diversification, removes much of the administrative issues associated with property investing.

However there are risks, with the obvious issue being one of control. By pooling your investment with so many others, you dont actually have any control over the asset. The investor doesn't have any say in the tenants, rent charged, how the property is managed or optimized. 

A bigger risk is liquidity, in that often the investor in these crowd funded properties have restrictions on when they are able to sell their holdings. And it is arguable whether there is sufficiently active liquid secondary market should you wish to sell your shares. 

Another issue to consider is the crowd funding platform itself. Is it run by a reputable organization? What is their track record? What happens if the property rental income doesn't pay for the expenses and borrowings? Will the platform cover it or are there any other liability issues?

I have looked at a number of crowd funding platforms and I have noticed the high level of fees involved. Many will charge you 5% up front and a profit share for their management of the rent of around 15% of the rent roll. Many also take a performance fee of 15-25% of the capital gain.

It's still early days for the crowd funding in the property sector, and the number of platforms is increasing in number and sophistication at a rapid rate. But I would caution investors if they believed that crowd funding provides them with a more simple and lower risk way to invest in property.