Real estate has always been a great investment opportunity for investors. In my opinion, real estate can be the safest and best way to achieve financial freedom. However, buying properties has been out of bounds to most individuals as it involves a huge amount of money. But what if I told you that you can participate in highly sophisticated projects which generate high income?
Real estate crowdfunding is a way of investing where a pool of individuals contribute a small amount of capital towards a specific real estate deal. The process is usually conducted through an online platform to reach an audience of potential investors.
For developers, crowdfunding offers them access to capital for a real estate development project. This approach has become a feasible alternative to traditional ways of raising capital.
As for the investors, it offers them the ability to become a shareholder in assets they may never be able to acquire as individuals.
How it works
The idea behind crowdfunding is that when a developer or real estate professional finds an opportunity, they don’t always have the ability to pursue the project by themselves. So they allow individuals to contribute some of the capital in order to execute the project.
First, the sponsor identifies an opportunity, plans the acquisition of property, and even takes the responsibility of its management and eventual sale of the asset. The crowdfunding platform is where the sponsor finds the investors who are looking to create passive income from real estate. A Special Purpose Vehicle (SPV) is created to acquire the asset in which the investors are shareholders.
Here’s an example of how this might work: Let’s say that a real developer finds an outdated commercial building that lacks modern amenities for a sale price of say, Rs 3 crore. After analysis, he determines that with an investment of 2Cr in renovations and leasing out the entire building, he can double the property’s rental income and the building will have a market value of Rs 8 crore within 4-5years. So instead of taking a bank loan for the entire Rs 5 crore, he opens up the opportunity for individual investors to become stakeholders in the project.
There are two ways an investor can be involved in a crowdfunding opportunity. When you invest in an equity-based model, you receive returns based on property rental income or earn a share of the property’s appraised value in case it is sold. Equity provides better returns compared to debt investing. Debt-based funding has been more popular as investors receive a fixed interest rate appropriate to the amount that you have invested.
Why you should invest in a crowdfunded real estate opportunity
When a sponsor identifies a real estate opportunity, he usually doesn’t have the capital to execute the project himself. So they allow individuals to contribute to the capital to execute the project.
Crowdfunding allows you to invest in highly sophisticated projects with low investment amounts. Unlike REITs, crowdfunded opportunities tend to be more transparent as it allows investment into specific projects without the hassles of maintaining and managing the assets.
Like any investment opportunity, it is important to evaluate crowdfunded real estate investments as they are highly illiquid. Unlike when you own a property by yourself, you can’t sell your investment whenever you want. You are committed for the entire holding period of the project.
Real estate crowdfunding opens the door to many investors who cannot otherwise invest in real estate. This is a great model for low investment investors who get access to high income-generating real estate. However, you need to evaluate a crowdfunding opportunity before investing.
Raiyaan Nayeem is the founder of Hubloft, a home-sharing company that enables homeowners to create passive income from their second homes.