Real Estate Crowdfunding 101

Crowdfunding is becoming increasingly fragmented with different forms ranging from donations through to alternative finance channels, like equity and debt crowdfunding. Press coverage and debate surround the benefits of such modes of finance, but there is a sector in crowdfunding that has gone largely unnoticed: Real Estate Crowdfunding.

Earlier this year, crowdfunding researcher, Massolution, released a report hinting at a 250% increase in the Real Estate Crowdfunding (RECF) market in 2015, to US$2.5 billion – based on its actual 2014 growth of 156%.

With such textbook, hockey-stick growth, you may be asking: “how does RECF work”?

What Are you Investing In?

There are two categories of RECF investments:

  1. Development Projects
  2. Property

The first allows investors to pool their money together to fund a vetted development project such as the development of an apartment complex, or a renovation.

The second is what many initially think of when “Real Estate Crowdfunding” is mentioned: multiple people purchasing ownership in a single property.

Do I Have Direct Ownership of the Property?

No – but that’s not a bad thing! When you invest through RECF, you’re buying a proportional stake (shares) in a company that directly owns the property. While some may prefer to own the property directly, they would have to register as “Tenants in Common” (TICs), which brings with it a whole host of legal issues.

Without going into the laundry list of legal problems that a TIC legal structure brings, it can be simply said that ownership via a company structure is simpler and less prone to legal disputes.

Where Do My Returns Come From?

As with any investment in property, there are two sources of return:

  1. Rental Income
  2. Capital Gains

If, however, your investment is in the first category of RECF (development projects) your income stream will likely be fully weighted on capital gains, as renovations and development do not generally allow for tenancy.

With reports of rising property markets around the world, investors are beginning to pull their money from their low-interest, bank deposits and invest them in higher-yield property.

Both rental income and capital gains will be apportioned to each investor, relative to his or her proportional stake in the property. So, while you may not experience the entirety of the benefits, you also do not experience all the risk, and this is a trade-off one will have to consider prior to investment.

Where Are These RECF Platforms?

Since you invest in a company, as opposed to the property directly, RECF platforms can be found in many different places. However, where it has found the greatest efficacy is in jurisdictions where equity crowdfunding regulations for retail investors have been set in motion.

Allowing retail investors to participate has truly opened up property investment to the masses and with some platforms offering $100 entry points, property investment no longer looks to be the domain of the rich and well-capitalised.

Also available on Equitise’s blog here

Cheers, Will

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