Real estate crowdfunding has many advantages, the main one being a lower threshold to enter the investment. Thanks to this, you do not need to have capital reserves, but you can still engage in a large project.
Real estate investments have a large barrier to entry due to the amount of capital.
On your own, you can invest in smaller projects such as buying an apartment for rent. If an individual investor dreams of getting into larger projects, they can do so with other investors. This is what real estate crowdfunding is all about
Imagine that you want to start investing in real estate. You know that large projects have too high a barrier to entry, due to the capital commitment required. Your time is also limited - you have a regular job and you are not able to lead the investment yourself to the full extent. Moreover, you don't have the courage - due to lack of experience and knowledge. Do you have to give up on your dreams?
No - this is where real estate crowdfunding comes in handy.
Working together in crowdfunding allows you to raise funds for any goal, such as buying a hotel. Real estate crowdfunding has recently been the fastest growing segment of group investing.
The concept of real estate crowdfunding
Real estate crowdfunding is a form of financing in which an organization initiating a real estate project through an online platform presents an offer to sell equity or debt instruments in a company or project in order to attract and encourage a large group of investors.
Investors can invest their funds to purchase, build a property. Once they have achieved their business goal, which may be to sell or rent, for example, they share the profits. The profit can be rent from the rental or income from the sale, or even a dividend or coupon on a loan.
The main advantage of real estate crowdfunding is a lower entry threshold. This means that you don't need to have a stockpile of capital, but you can still commit to a large project. Other advantages include the fact that investors do not have to limit themselves to one type of investment, thus diversifying their portfolio. In this way, they reduce the risk of investment failure. Besides, using the platforms you can invest even without leaving home.
Real estate crowdfunding is a form of capital raising for organizations. Group funding allows an organization to quickly raise the needed capital to make an investment. It is less costly than issuing bonds or stocks. Crowd investing takes different forms, these include:
- Equity crowdfunding, where investors in exchange for donated capital acquire share rights in the developer's company;
- Loan crowdfunding, where the investor gives a loan to achieve a specific goal.
The objects of investment can be hotels, commercial properties, residential properties, but also land properties or properties for renovation.
Crowdfunding platforms should be considered as a source of knowledge about planned investments. People choose on the site which project they want to invest in - and in the future they reap the established benefits. With each offer, a business cooperation model is described, which specifies the level of security, the forecast rate of return and the amount of required capital. The investment agreement specifies, among other things, the subject of the construction, as well as rules for generating and distributing profit after the sale of the property. Investors themselves decide with what capital they want to enter the project, which makes the offers available to everyone.
When deciding to invest through the platform, one should first of all pay attention to the type of property, types of fees, the period of return on investment, the reliability of the platform, completed investments, investors' opinions, methods of protecting the capital of shareholders, access to information about the progress of work and the possibility of exiting the project before time.
Equity investments carry a higher level of risk. Hence, the expected rate of return on these investments is characterized by a higher level than the rate of return obtained in the loan model.
Under the equity system, the rate of return on real estate investments is higher than deposits and bonds.
The first crowdfunding platform was launched in 2010, and five years later there were as many as 214 such sites operating worldwide. According to the information of one of such portals - crowdrealestate.pl - it is estimated that today there are more than 1,000 such entities worldwide - a significant increase compared to the 2014 result.
Today, browsing the web, you can easily come across many offers of social investment. An example of a portal where you can find such offers is Odyseos Hotels. As you can find out on the site, it is an application for investing in hotel properties around the world. There are also portals where residential investments or mixed investments are offered.
According to various estimates, almost 70% of the total real estate crowdfunding capital is raised through platforms based in the US. Social real estate investment platforms are also popular in the UK, Australia. They have been slow to develop in Europe, so there is still untapped potential.
Group investment in real estate allows smaller investors to finance large projects. Interestingly, without the need for credit. It is a relatively safe investment of capital. However, like any other method of investing in real estate, it is not completely without risk, which should always be taken into account. Therefore, every investor should keep his hand on the pulse. It is projected that this alternative investment financing sector will have an upward trend.