what is real estate crowdfunding and how does it work?
What is crowd funding?
Real estate crowdfunding is a method of funding a real estate project using a small amount of funds from a large number of fundraisers. A developer/organizer will organize a campaign to buy to buy a property of 10000 usd and the property will be bought in shares. Depending on the number of fundraisers and how much a share can cost to buy it up.
Crowd funding gives developers access to networks of colleagues, friends, family, and even the general public. It’s one of the hottest new ways to diversify your financial portfolio today. Used by the old and young generation. It is a good skim to contribute money and startup new
crowd funding for developers to raise capital. Deals no longer depend solely on how many affluent people in small circles will agree to finance a project. The main aim is to grow wealth by property ownership methodologies.it gives the best opportunity to diversify your portfolio as a developer
Who Is Real Estate Crowd funding Best Suited For?
real estate crowd funding is open to anybody willing to diversify his investments. It’ a passive income strategy and most suitable for less or no supervision on projects. the profitable margin in crowd funding can only be accomplished with some minimum required starting capital for any body.
How property crowd funding works
crowd funding enables businesses to attract shareholders in the business through the practice of funding a project by contributing sums of money from a crowd of people who are willing to invest in the business. For example an idea like real estate crowd funding has potential clients that are interested in the young and old.
Crowd funding is mainly hosted on the internet because of the digital revolution that we are experiencing. The benefits of the internet are it is widely spread through social networks that have billions of users. We are now seeing growing trends of online fundraisers on trusted platforms. Concepts can be pitched straight to the internet users to pool a capital with an aim of property ownership
Advantages for real estate crowd funding
Tapping in to advantages of crowd funding to raise finance for their real estate idea on concept of points below.
- No or less fee costs for registration for a new member
- Passive investments that bring dividends in the real estate investments
- Small and large investments depends on your affordability with shared cost structures
- Quick wide spread exposure. They are normally online and spread so fast to people.
- Minimal exposure to risk since the teams are properly set up
- The target amount can be achieved faster due to the wide online spread campaign
- Vast database of knowledge since it’s a big platform of different personalities
- No debts are involved when starting.
Disadvantages of real estate crowd funding
- Lower investment returns
- Illiquidity assets. Hard to turn to cash
- It’s not a short-term investment
- You could lose your entire investment if the market price is inflated.
Types of crowd funding.
Direct Equity Investment
This type of investment allows accredited funders to directly fund real estate projects that are targeted projects on the platform. The scheme requires investors in Real estate to have a minimum capital allocated to the investment.
The deal terms and accounting are catered for by the sponsor of the project. This investment requires the investors to take two years or more as a holding period.
Direct Investment in a New Entity
The investor is provided with a variety of entities other than the actual project by the platform. The investor takes his own choice on which entity to invest. The securities are issued by the entity. The platform will take care of the payments. The duration may run from one year to five years. The payment is always a fixed price.
The eREIT is an innovative real estate crowd funding model that offers investors a fixed rate of return, quarterly distributions and low fees for investments. eREITs charges no fees over the first two years until your investment earns a 15% annualized return. Offers an option of quarterly liquidity. Holding periods range from one to three years.
Fund of funds.
Invest across other real estate crowdfunding platforms to diversify holdings using the collected funds. The team handles and invests the funds on small business and large deals. The investor may be subjected to a double payment like on the deal level and fund level. The holding period maybe one to three years.
Auto-investments in Debt.
This system allows investors to set particular investment criteria, upon which the system automatically allocates a certain amount of funds into investments that fit their guidelines. It saves the hassle of analyzing each individual investment opportunity and little knowledge is required.
An investor may have stayed away from some deals but the algorithms analyzes the investor’s criteria tries to avoid this. This method is rising highly. Its set returns are between 6%-12%.
How to Get Started with Real Estate crowd funding
If you are interested to join crowdfunding, select a crowdfunding platform to join, remember each platform comes with different requirements for you to join. The most important requirement as you choose the platform is the minimum investment amount. If you are okay with your choices and holding years numbers before payments.
most platforms will provide you with an equity or debt investment. Returns occur in the form of an equity share of the total rental income or profit if the project is sold. As for debt investments, you will be placing your investment directly into a loan.
These loans are typically secured by the underlying real estate serving as collateral and will be repaid with interest on a monthly or quarterly basis, after which a percentage will be provided to each investor. You can buy 1-10 shares depending on the platform and await passively to start making money.
crowd funding serves as a solution purchasing real estate investments as a group of shareholders to diversify portfolio. Real estate deals always need funding and investors are always looking for ways to make more money. A recap on the methods used :
- Auto-investments in Debt
- Fund of funds
- Direct Investment in a New Entity
- Direct Equity Investment