Crowdfunding As a Form of Joint Investment in Real Estate

Source: westerninvestor.com

Crowdfunding is basically a very attractive way in which legal entities and individuals can raise the necessary funds on the one hand, and on the other hand, it provides potential investors with simplified access to the same funds for the implementation of a particular project.

As we can see, the term “crowdfunding” consists of two parts: crowd and funding, which means that a large number of interested investors, with very small individual amounts, can participate in financing a project or idea that has not yet started or an existing project that needs additional funds to be completed.

Interested investors and those raising funds are tied up through a specially developed crowdfunding web platform. Each project or plan on the platform must be explained and defined in detail, as well as the return on investment by the one who wants to raise the necessary funds. Those who invest in such a project are obliged to create their accounts, agree to the required conditions of the platform, and pay their money.

This possibility, that a large number of investors with smaller amounts (minimum investment amounts are defined by each web platform in accordance with its business interests) participates in the financing of various projects makes it very attractive to invest in a fast-growing real estate market.

We will mention that crowdfunding is a suitable way of investing, not only in real estate but in many other sustainable types of entrepreneurship and happenings – such as selling apparel, fundraisers, bookmakers (some of which can be found here), artistic projects, political campaigns…

How Does Joint Real Estate Investment Work in Practice?

Source: corporatefinanceinstitute.com

The dynamic growth of the real estate market is attracting an increasing number of investors with significant financial resources. However, the development of crowdfunding platforms has enabled the investment of a larger number of investors with incomparably smaller amounts.

The first Internet crowdfunding platforms were developed in the United States, and one of the first and largest platforms is Fundrise, which allows its users to participate as investors with very low initial stakes of only $ 500. In addition, in 2015, this platform introduced the electronic real estate investment trust fund (eREIT) to make real estate investment even more accessible to a large number of investors. The most famous big platforms are Realty Mogul, Crowd Street, Patch of Land, Realty Shares, Real Crowd, as well as many other smaller web platforms.

In order to legally regulate this segment of investment, the Jumpstart Our Business Startups (JOBS) Act was passed in 2012, which enables investment even to non-accredited investors (citizens) compared to the previous practice where only accredited investors such as pension funds, banks, insurance companies, and investment funds had access to investment. Until then, investors could only invest in real estate by buying physical assets or investing in REITs (real estate investment trusts).

The new method of investing in real estate through crowdfunding allows the investor to, as in the case of investing in capital, participate in the financing of only a part of the property, instead of the entire property, and become a shareholder of its proportionate share. Also, profits from e.g. renting or selling real estate will be paid to investors in proportion to their deposits.

The return on investment depends on the type and class of real estate in which it is invested and varies from 5-15 % per year, and in some cases may be more than that. Average returns in real estate crowdfunding range between 8 % and 13 % per year, which makes this co-financing model very attractive.

Ways of Joint Investment in the Real Estate Market

Source: nhbr.com

Interested investors have two options to place their funds on the real estate market through crowdfunding:

Equity-Based Crowdfunding

Source: techcrunch.com

It provides the investor with a higher rate of return than investing in debt. This way of investing profits can vary significantly depending on current market conditions, and investors receive payments that are usually quarterly from renting real estate less the commission of the web platform, as well as in the case of selling real estate at an increased market price.

One of the main risks of this method of investing is the possibility that the market value of the property will decrease, so investors may lose part of their investment.

Lending-Based Crowdfunding

Source: corporatecomplianceinsights.com

This is a simpler way of investing in which the investor lends financial resources to the property owner and receives a fixed interest rate for that service based on the mortgage of the property owner and the amount that the investor has invested (lent to the owner).

With this type of investment, the profit is fixed because the fixed interest rate is predefined, and the risk is lower than with capital-based investments. Interest payments are mostly monthly, less often quarterly, and the advantage of this method of investment is that the investment is secured by assets (mortgage).

The Trend of the Global Real Estate Crowdfunding Market

Source: investorplace.com

The absolute world record holder in the total amounts collected through crowdfunding is China where the amount of joint financing amounted to as much as $215.4 billion in 2020, while the United States is in second place with a total amount of $61.1 billion collected in the same year.

As the real estate market is one of the fastest-growing sectors within crowdfunding, the value of real estate crowdfunding in China reached a value of about $2.4 billion in 2017. In 2014, in the USA, the joint investment in real estate recorded a growth of an incredible 156 % compared to the previous year, and the value of transactions exceeded $1 billion.

Growth continued in the following years, so in 2015 the volume of joint investment (real estate crowdfunding) reached $2.57 billion, and in 2016, $3.5 billion, with an estimate that by 2025 it could reach a value of almost $10 billion.

Crowdfunding as an Alternative to Existing (Traditional) Methods of Joint Investment

Source: financialexpress.com

At the very beginning, the investor should consider the investment in detail, which means getting to know the project, geographical and demographic conditions, political situation, and everything that can affect the invested funds and the expected return.

One of the main advantages of this way of investing is the accessibility to a large number of people (individuals) with relatively small investments (depending on the platform and the type of real estate in which they invest), which can be below $ 500 but mostly around $ 5,000, which is a great convenience considering the price of the average property, which can cost several hundred thousand or even over a million dollars.

In addition, crowdfunding in real estate is done through Internet platforms that operate transparently and provide investors with unlimited access to information before investing their money, and the platform we have chosen does a complete job for us such as finding the most optimal real estate and all other administrative tasks.

Unlike REITs funds managed by professionals, in this case, you have the freedom to research and choose which property you want to invest your funds in, and the existence of a large number of web platforms for investment provides you with a wide range of projects, so by choosing different classes of real estate you can diversify an investment portfolio.

On the other hand, unlike traditional ways of joint investment, in crowdfunding you cannot be sure that e.g. the project in which you have invested funds will really be successfully completed, and as you independently decide on the property in which you will invest, there is a possibility that you will lose your money by a wrong decision. Also, most projects are not insured, and numerous fees and charges can further reduce the expected return.

Conclusion

Generally observing the availability of almost every individual to invest their funds or collect them through publicly available and transparent Internet platforms, we can freely say that it represents a revolution in the current way of doing business in the real estate market, which has led to a huge increase in interest in this type of real estate investment.

The advantage is that the returns within crowdfunding are not small (which implies a higher degree of risk) and far exceed inflation, as well as the fact that raising capital for the implementation of the project makes it faster and simpler. The upward growth trend of real estate crowdfunding is yet to gain momentum.

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