Crowdfunding

Real Estate Crowdfunding – The Best Way To Invest In Real Estate

crowdfunding real estate loans

Real Estate Crowdfunding enables one to invest easily in real estate using the internet and social media. It is like having an online real estate investment market.

This article is to explain Real Estate crowdfunding basics.Following topics are covered in this post.

  1. What exactly is Real Estate Crowdfunding?
  2. The Beginning of real estate crowdfunding
  3. Players involved in Real Estate Crowdfunding
  4. Various Real Estate Crowdfunding Investing options
  5. Real Estate Crowdfunding vs REITs
  6. Benefits of investing via Real Estate crowdfunding
  7. What are the Exit strategies followed by real estate crowdfunding platforms

What exactly is Real Estate Crowdfunding?

Crowdfunding is converting an idea into reality using funds raised from a large number of small investors. What lacks in the way of amount is made up in terms of the volumes. One of the many variants of this is real estate crowdfunding.

In a sector which has traditionally been known for its opaqueness and huge entry costs, real estate crowdfunding is like a breath of fresh air. One of the best things about it is it has something for everybody- right from novices to experienced investors. Part of its value lies in its ability to diversify risk for the investor and that too in a typically high risk sector, consequentially bringing in more stability.

The popularity of real estate crowdfunding has been growing in leaps and bounds over the years and is expected to go the same way in the near future. As per Crowdfund Capital Advisors, the U.S. has more than 125 real estate crowdfunding sites, just three years after the JOBS Act made legalized the use of online platforms for investments.  In 2015, a study conducted by Massolution claimed that investors put in about $1 billion in real estate crowdfunding in USA.

Another case in point is the recent announcement made by RealtyShares, which is an online platform for real estate crowdfunding, that it was able to raise more than $200 million from its investors in various projects. The Hard Rock Hotel, Palm Springs which was in the news some time back for using crowdfunding for a 15% equity stake for $1.5 million is another example.

And the list goes on and on. We have enough cases to know that this phenomenon is catching on ‘real’ fast and as time goes on, more investors would turn to this rather than the traditional forms of investing- mainly due to benefits like limited liability, ease in managing and easy access, a relatively higher return rate.

Examples of crowdfunding real estate sites include Realty Mogul, Acquire Real Estate, FundRise, RealtyShares and Patch of Land.

The Beginning of Real Estate crowdfunding

Our story begins with sites like Kickstarter, Indiegogo and GoFundMe. They introduced us to the world of alternate finance in a way never been done before. It caught on like wildfire and before long, entrepreneurs were raising capital and investors reaping returns- a classic win-win situation.  At a time when the stock markets were at an all time low, the economy- a mess and no real lucrative options for investments, crowdfunding became a rage. Along came real estate investing, with Silicon Valley producing many great real estate crowdfunding sites. All these sites have been a rage and raked in oodles of money. real estate crowdfunding is fast becoming the norm when it comes to real estate.

An early example is the World Trade Center, in Manhattan, was opened up to investors via online crowdfunding. Now we have established players like financial firms and mortgage lenders who have used this opportunity to increase their online presence via crowdfunding platforms.

Another factor which hastened its progress was the JOBS Act of 2012 which came into effect in late 2013. Various provisions like Title II, III and IV helped in further loosening of the regulations.

Players involved in Real Estate Crowdfunding

There are three main players here

Platform: Real estate crowdfunding platform is the intermediary between the entrepreneur and the investor. It lists the different types of opportunities and provides all relevant information for the investors interested in getting involved.

Investor: The person interested in giving money and earning a return in turn. A point to note is till May 16, 2016, investor for real estate crowdfunding was limited to accredited only. No unaccredited investors were allowed. This changed after May 16, 2016 with the SEC changing some rules although it still has many caps and limitations in place to safeguard the interest of the common investor. Basically, the regulations intend to ensure that investors have an understanding of the risks involved and should be able to afford to lose money

Company/ entrepreneur:  This is the party looking to raise finance via debt or equity. Also, in case of real estate crowdfunding, this party manages the property and everything related to it like developing, refurbishing etc

Various Real Estate Crowdfunding Investing options

Direct Investment: In this scenario, the platform is like the marketplace and connects both the parties but its role is very limited. The investors here have a direct relationship with the sponsor and the platform just serves as an intermediary- there is no hand holding and the entire onus lies on the investor. Hence it is extremely important to research and conduct due diligence on your own. Popular examples include EarlyShares and CrowdStreet.

Indirect Investment: Here, the platform has a major role to play. It not only connects the parties but also manages relationship with the sponsor on behalf of the investor as well as manages the investments. Typically, a Special Purpose Vehicle is created for this purpose. This method makes the entire process more manageable as now the sponsor has to deal with one entitiy rather than many investors. From the investor’s point of view, the platform takes care of all the research and due diligence and is safer. This is not to suggest that one should not do their own research. Independent study should always be done before any such investment is undertaken. Some examples of this type are RealtyShares, Fundrise and Realty Mogul etc. this type of platform is very popular and most probably the future

Real Estate Crowdfunding vs REITs

REITS or Real estate investment trusts are essentially companies that collect funds from many investors and invest in various types of real estates. This sounds familiar to Real Estate Crowdfunding but there are some basic differences between the two:

  1. Time span: In Real Estate Crowdfunding, the funds are locked in for the time span of the investment which means you can’t pull out money from it. On the other hand, in case of REITs (publicly traded), you can easily sell the shares and get out.
  2. Scope: In Real Estate Crowdfunding, the investor is more in control of where he wants to invest as opposed to REITs which already has a portfolio of properties
  3. Scale: while REITs are usually big in terms of the kind of properties owned, Real Estate Crowdfunding offers many options like small retail stores, family buildings etc.
  4. Transparency: Real Estate Crowdfunding is more transparent tha REITs. A major reason for that is due to the large number of holdings in a typical REIT which makes it more complicated.

Benefits of investing via Real Estate Crowdfunding

  1. Encourages diversification of assets

You must have heard of the old adage about never putting all your eggs in one basket. In conventional real estate, investment limited to a single project makes the investor vulnerable to higher risk of loss. But with real estate crowdfunding, investors can put in multiple smaller amounts of money into various projects, leading to diversification and hence reduction of the risk.

  1. Better control over investments

real estate crowdfunding lets you be the judge of which real estate properties to invest in. This is different form REITs wherein one cannot choose the properties to invest in. Also, in real estate crowdfunding, you are made privy to all relevant facts about the property in question and can track the progress of the project continuously over its entire duration. Hence overall, with more customization, information and tracking, real estate crowdfunding gives you better control over your investment..

  1. Lower entry barrier

Real estate has traditionally been the game of the wealthy and well endowed owing to the huge investment needed just to enter it along with the huge risk appetite it demands. real estate crowdfunding changes that by dramatically lowering the ‘entry fee’. This opens the avenue for a wider range of investors who can have a piece of the growth story too. Today, one can enter the market with as little as $1000. This also makes the market more liquid.

  1. Earning passively

Who would not like their money to make more money without putting in much effort? From that perspective, real estate crowdfunding is better than investing directly in it. This is because, unlike in conventional methods, here the investor does not have to be involved in managing the day to day affair so the properties while he continues to earns monthly payments. Hence this is a god option for those who do not have the time and expertise or are looking to earn passive income.

  1. Availability of more properties

Real estate crowdfunding offers continuous updates and information about availability of diverse investment opportunities. This widens your options and you can plan as per your risk appetite. Also, as real estate crowdfunding becomes more popular by the day, more properties get listed on a daily basis and hence more opportunities for the investors.

  1. Liability is Limited

Real estate crowdfunding offers limited liability to the extent of the amount invested. This is at variance with traditional investment methods wherein the investors are required to not only to pay the direct cost but also any other liability and there is no protection given from any other liability which may arise.

  1. Higher rate of return

In real estate crowdfunding, investors invest directly in the property and this reduces the costs associated and directly impacts the bottom line of the investment. Contrast this with traditional real estate where, due to the presence of so many intermediaries, there is a lot of cost in the form of fees, commissions etc. thus real estate crowdfunding gives a higher rate of return.

  1. Time, efficiency and speed

With internet serving as the medium of interaction, the speed and efficiency is simply enormous. In fact, this is one of the reasons which will ensure crowfunding’s success as alternate finance. Everything is done quickly. There is no jumping through the hoops for banks, institutions etc. the technology ensures everything is tracked and transparent. All this drastically improves the overall efficiency which also impacts the returns posititvely.

  1. Globalization of property Sector

Before all this technology, platforms and internet, real estate investment was limited to the properties you could vet physically or within a certain limited distance. However, now things have changed absolutely. You can invest in any part of the world sitting in your house. All the relevant information is available online via platforms.

Exit strategies followed by real estate crowdfunding platforms

An exit strategy serves the purpose of enabling an investor to leave as and when they want. The easier it is to exit an investment, the more people are willing to invest readily as it means the market is liquid and their investment won’t be stuck. Recently a report by TRN was in the news. This dealt with the various kinds of Exit Strategies adopted by Real Estate Crowdfunding Platforms. One basic strategy is allowing the investor to see his shares to a buyer in the secondary market. Other strategies can be checked out here. The basic rule is any exit should not impact the continuance of the project adversely. The secondary market for real estate crowdfunding is still developing. A very prominent example is Property Partner, which is a platform for UK real estate and has had about £10 million of property shares exchanged on their secondary market. Doing justice to its famous line “bricks and mortar can be liquid assets”, Property Partner has over 8600 investors who have traded in these shares- a platform that may be a world’s “first”.

Overall, the real estate crowdfunding market is still in its nascent stage and a little hyped up at the moment. There are plenty of options available out there and it is only after doing extensive research on the individual requirements that should one decide to take the plunge. One thing is for certain, it will be a thrilling experience!

 

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