Crowdfunding is a way of sourcing funds for new ventures that has really leapt off the ground in recent years. The development in information technology is the main reason for the uptick, as crowdfunding is a method that leverages on community support to garner financial support for the venture or project being considered. Online platforms make it easier than ever to pitch new ideas to a large number of people. There are many kinds of crowdfunding, which come with their own kinds of pros and cons. Real estate crowdfunding platforms are those that help finance property assets for retail investors. This enables them to acquire high-value assets that would otherwise have been beyond their means. The most sophisticated of real estate crowdfunding platforms even service the paperwork and property management end of real estate investment.
Advantages of real estate crowdfunding
Real estate crowdfunding differs from individual investment through the unique benefits and challenges it offers. For one, crowdfunding platforms offer investors greater access to a higher level of resources. This is because it bridges the gap between two groups of people – a large group of individuals who are prepared to invest a small amount of money, and a smaller group of people who need a larger amount of money to make full use of the opportunities available to them. The liquidity potential of real estate crowdfunding is also higher than investing individually in real estate. As with other investment vehicles, real estate crowdfunding offers investors the opportunity to trade their stake in the overall investment to meet their individual liquidity needs. The US Securities and Exchange Commission has also lifted restrictions placed on non-accredited investors from investing in crowdfunding. This applies to investing in real estate as well.
Real estate crowdfunding and equity crowdfunding
Real estate crowdfunding shares a few similarities to equity crowdfunding. Equity crowdfunding is also a method in which a large group of people invest in larger assets, thereby becoming a shareholder of the asset. Shareholders of real estate benefit through rental income and liquidity proceeds however, while equity shareholders benefit from profits, interest, and liquidity proceeds. Real estate crowdfunding is also an easy opportunity to diversify from the equity market as it can be bought into at a lower price point.
There are also several reasons why real estate crowdfunding is preferred by investors over equity investment opportunities. One reason is the tangibility of the asset. Real estate is a manifestly tangible asset. This makes an investment in real estate an easier concept to grasp for even newcomers into the investment market. Equity investments may be harder, and thereby even intimidating, for newcomers to understand. Investing in a startup business for example requires that the investor learn the basics of a new business and/or industry – to a level that they are able to evaluate the risks and rewards associated with the business. When it comes to investing in real estate, investors are able to fall back on a degree of common sense borne of experience to make use of publicly available information to make at least an educated guess on the value and the potential of what they are investing in.
Disadvantages of real estate crowdfunding
Real estate crowdfunding on the other hand, is not without its disadvantages. Any investment opportunity comes with its own risks, and there is always the possibility that a real estate investment may not yield the return expected of it. Crowdfunding entails that the investor entrusts their investment in the potential of a third party’s ability to make good on their venture. Additionally, allowing players other than accredited investors into the market also means that real estate crowdfunding might suffer for the lack of regulation and vetting. The high levels of funds involved make the space an attractive one for bad actors.
Factors to consider in investing in real estate crowdfunding
Given the number of new players in real estate crowdfunding as well as the scale of the resources involved, there are often bad eggs involved in the industry. One important detail to look out for are capital seekers that oversell or paint over-optimistic pictures of the future. All pitches try to forecast optimistic numbers, of course, but it’s prudent to be wary of pitches that only take best-case scenarios and the most optimal multiples into consideration. A realistic pitch should present various possible scenarios and the yield figures relevant to each case for potential investors to gather the best possible understanding of what they could realistically expect.
One way of safeguarding against the risk of a bad actor is by participating in investment opportunities where the capital seeker has a significant interest or stake in the proposed business venture. Low stakes in one’s own venture can point to either the capital seeker’s own lack of faith in their venture, or a disinclination to shoulder significant responsibility as a steward for the capital resource. Understanding the capital structure that you are buying into is also vital in real estate crowdfunding as it is with other forms of investment.
Real estate crowdfunders hold stakes in an equity portion of whatever business they invest in, and so will be subject to the same conditions that equity partners are, from the point of view of the business. This means that they will shoulder a 100% of any losses, should they arise. This is because equity partners come in last in order of preference, should a company rank all investors in the business by order of their priority of payment.
As with all forms of crowdfunding there are also inherent platform risks associated with real estate crowdfunding. There are many crowdfunding platforms on the market today, and many that cater specifically to real estate crowdfunding. It is important that due diligence is carried out to make sure that the platform itself is a well established one, that safeguards investors against bad actors as much as possible. Crowdfunding platforms often do so by implementing rules such as refunding investors if a venture does not meet its funding goals within a given time frame.
According to market research, the real estate crowdfunding industry was estimated to be worth over ten billion US dollars by 2021. It was expected to have a growth rate of close to 45.6% by as early as 2030.
In an era where unprecedented levels of global inflation is limiting the ability of ordinary people to participate in economic activities beyond daily expenditure, investing in real estate is a traditional method of mitigating inflation’s effects against savings, one that many will appreciate being able to participate in.
(Theruni Liyanage)