Learn about the 5 pillars of investing on a crowdfunding platform
Welcome to this MercyCrowd tutorial.
Today we are going to discuss the main 5 points that you need to consider before investing on crowdfunding platforms.
When investing, you have the potential to benefit from any increase in value of the asset in which you invest. However the money that you invest ('your capital') is not guaranteed: the value of your investment may fall and you can lose part or all of your capital. For example if the house that you bought decreases in value and you sell it, you will get back less money that you iniitially invested. If the house was rented while you owned it you might still have earned money but what is important is to realise is that the value of your investment might down as well as up.
Tips: Only invest money that you can afford to lose without changing your lifestyle.
What does liquidity mean? Basically it refers to the concept of how long and how easy it is to transform your investment into cash. So for example with your bank account it’s relatively easy to access your cash, you can go to almost any ATM worldwide and withdraw money: your bank account is 'liquid'. On the opposite side a famous painting will take time to transform itself into cash, because if you want to sell it you will need to provide authentication of ownership, to ensure that it’s not a fake and more importantly finding a buyer that is ready to purchase the painting at your asking price… that can take weeks if not months. You can imagine that art is considered as an illiquid asset.
The important point to understand is that a property is not as liquid as cash, therefore you should not invest
money that you might need in the short term.
Tips: Investment in properties should be considered only for long term saving.
Rental Income and Capital Appreciation
When you invest in a property you expect a return on your investment. Hopefully the return will be composed of two elements: income coming from the rent paid by the tenant if you are leasing the property and capital appreciation, if you manage to sell the property at a higher price than you bought it
Here it’s important to understand that neither the rent nor capital appreciation are guaranteed. Rent can certainly vary from year to year, sometimes you will earn more and sometimes less than expected and although historically property has been viewed as a ‘safe investment’ the value of property can fall as well as rise.
Tips: The longer you hold the asset the better, as it will on average have a better chance of reaching your expected return.
As the old saying goes: Don’t put all your eggs in the same basket! This can be considered at two levels, first of all don’t invest all your money in a single asset. Don’t invest for example all your money on listed equities or bonds. A well diversified investment portfolio should be composed of several types of assets. The second level of diversification is that, within the same asset class, you should not invest all your capital in one project but rather spread it around several projects.
Tips: Diversification wise its better to invest £1,000 in 10 different projects rather than £10,000 in one single project.
Now let's say that you live in France and would like to get exposure to a UK property project. Its important for you to understand that you are also taking an exposure to a foreign currency, namely the British pound. What does that mean for you?
Earlier we spoke about what your potential return is composed of: capital appreciation and income from leasing the property. Well if you invest in a foreign property you can add the performance of the foreign currency to the equation. In our example it means that if the pound appreciates against the Euro you will make more money in Euro and if the Euro appreciates against the pound you will make less.
Tips: Investing in a foreign property can help in diversifying your investment portfolio. However most of your investment should be done with your home currency.
These 5 considerations are generic rules and by no means you should take this tutorial as investment advice. We always encourage people to seek professional advice as each personal situation is unique.
Please visit our website to learn more about crowdfunding and investment opportunities.