Rapidly gaining widespread acceptance across the globe, the real estate crowdfunding model presents a number of advantages for both property investors and developers. Here’s how it works.
What is real estate crowdfunding?
Real estate crowdfunding is when a large group of individuals raise money for a specific property project. Individual contributions are pooled as the 'crowd' for a common collective project proposed by a property developer, which can include property investments, developments and constructions.
The benefits of real estate crowdfunding
Property investors and developers are drawn to the real estate crowdfunding model as it has many advantages over traditional forms of property investment.
For the investor
Smaller investments: Investors are able to make smaller incremental investment, rather than the typically large funding portions required in the current property market.
Less admin: There’s no need to get involved in the day-to-day administration or running costs of owning a property.
Personalised: Choose the individual properties or projects that best suit your investment objectives and risk profile.
Exclusive: Participate in projects that are not usually accessible to the general public, such as commercial property developments.
Direct communication: Communicate directly with the property project sponsor.
Save time and costs: Conveniently browse projects on an online platform. There are no costs associated with investing in a project aside from the investment amount itself.
For the developer
Attract investors: Developers can gain exposure on a platform that drives significant investor traffic to their company profile.
Access to investor base: Immediately increase your investor base and access qualified investor networks.
Save time and costs: Online platform provides a user-friendly means of attracting, engaging and capitalising on an investor audience.
Unique, custom-built technology: Integrated AML, data analysis and an automated offer and acceptance process makes the process simple and streamlined.
Crowdfunding vs ASX listed property trust
Listed property trusts (REITs) invest in a wide range of properties and charge significant ongoing management fees, in some cases 15 per cent of capital invested. REITs also have an increased market exposure due to the volatile nature of the ASX. Crowdfunded properties allow investors to select the individual properties or projects they wish to get involved with. In addition, listed property trusts don't usually participate in smaller projects or certain types of projects, like commercial developments or apartment construction.
What does an investor receive?
When you invest in a crowdfunded property project, you actually invest in the shares of a company or units in a trust (also known as an ‘interest’). The company or unit trust in turn buys the property and/or manages the property development. As a security holder, you will hold the rights associated with the class of security that you have agreed to purchase. You may hold the same rights as the project owner by acquiring ordinary shares in a development company. Alternatively, you may acquire preference shares in the company but receive a high rate of return on your investment.
How are property partners selected?
A responsible real estate crowdfunding platform will look for high-quality, experienced project sponsors with an established track record.
As such, the selection criteria will often take into consideration:
- Appropriate licences
- Key personnel
- Current portfolio size
- The reasonableness of the project proposal
When are returns received?
Each project is unique, so returns or distributions will depend on the individual project. Some projects may provide distributions immediately, like a property investment, while a property development may only pay distributions once the project is complete. The project description will provide an indication of the expected returns and the timing of returns.