What is Real Estate Crowdfunding?

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Two People shaking hands infront of real estate crowdfunded building

Crowdfunding is an exciting, new way of raising capital. In Crowdfunding, you accumulate capital from a large pool of investors rather than looking for a lump sum investment by one investor. While this capital can be raised for many reasons, Real Estate Crowdfunding has been gaining popularity over the last few years. In this article, we will endeavour to answer some basic questions about raising capital for real estate by leveraging Crowdfunding.

Real Estate Crowdfunding for Borrowers:

Real Estate Crowdfunding offers many benefits to borrowers who require funding to complete a project. Some of the benefits include:

  • A platform where they can get in touch with investors in a simple and hassle-free manner.
  • Usually, funding from such platforms can be secured much sooner than availing a loan from a bank.
  • Crowdfunding platforms have lower overhead costs as compared to banks, the fees and charges associated with processing the application are also much lower. This essentially means that the costs incurred in securing funding are much lesser than the interest paid to banks for a loan.
  • Real Estate Crowdfunding platforms are highly flexible when it comes to the type of property, like multi-family residential, industrial, retail, office, self-storage properties, etc. or the kind of financing option like fix-and-sell projects, that you might be looking for.

In a nutshell, real estate crowdfunding can help many borrowers realize their dreams in a quick, easy and cost-efficient manner.

Raising capital for real estate:

Broadly, here are the steps that you would need to follow to raise capital for real estate using Crowdfunding:

  1. Find a credible Crowdfunding platform. Look for established and experienced companies who ensure that they verify the investors and borrowers diligently before taking them on board.
  2. Submit your application.
  3. On receiving an approval from the platform, you need to submit more details about the project. The platform might run a credit check before it showcases the project to investors
  4. Now, investors view the project details and ask questions, if any.
  5. Funds are released to you once complete funding is received and pre-release processes are completed.

Real Estate fundraising can be easy and quick using Crowdfunding platforms.

Real Estate Crowdfunding for Investors:

As compared to investing in a Real Estate Investment Trust (REIT) or purchasing a property, real estate Crowdfunding offers the following benefits to investors:

  • Projects offered on Crowdfunding platforms offer maximum details to investors so that they can take informed decisions. The platforms exercise due diligence before making a project available to investors too.
  • Unlike purchasing a property, you can invest really low amounts in real estate by using the Crowdfunding alternative.
  • You can diversify across various types of properties by investing small amounts in different projects. Thereby, you gain access to new asset classes with lower entry barriers.

As an investor on a real estate crowdfunding platform, follow these tips:

  • Research well. Be judicious while choosing the Crowdfunding platform. Look for ones who verify project diligently before offering them to investors.
  • Ensure that your investments are in sync with your financial goals, risk preference and time horizon of investments. It is easy to be attracted to a project that seems like a good investment opportunity. However, ensuring that you follow your investment plan can help you grow at a steady pace without unexpected hindrances. Talk to your financial advisor before making any real estate investments.
  • Liquidity is an important parameter when it comes to investments in real estate. Every project can have a different return profile. Ensure that you understand the exact period of time for which your investment will be locked before you sign the dotted line.
  • There is no investment without an element of risk attached to it. The same applies to real estate investments as well. Ensure that you understand all the risks associated with your investment and assess if they align with your risk preference.

Equity and Debt alternatives in Real Estate Crowdfunding:

In Real Estate Crowdfunding, equity investments are the most preferred type of investment since it offers a possibility of a higher return than a debt investment. An equity investment gives you a stake in the residential or commercial property making you a shareholder. Your income is based on the rental income received from the property, post deduction of the fees/charges of the Crowdfunding platform. If the property is sold, then you also receive a share of its appreciated value.

Debt investing, on the other hand, makes you a lender to the property owner. A rate of interest is predetermined before you invest. Typically, repayments are made every month/quarter. If the property is sold, then debt investors are given priority over equity investors.

Summing up

Real Estate Crowdfunding is still in its early stages in most economies. However, these platforms offer a simpler and more democratic alternative of investing in the real estate market. With property prices soaring, Crowdfunding gives you an opportunity to add diversity to your investment portfolio by including real estate as an asset class.

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