This article has been written by Pankit Shah pursuing the Certificate Course in Real Estate Laws from LawSikho.
Table of Contents
Introduction
A traditional source of capital like Banks, NBFC, Pension Funds, and the like- move to the sidelines due to the Coronavirus pandemic. Real Estate Promoters are looking for alternative ways to aggregate funds for their projects. For the Promoters of the Real Estate project, getting crowdfunding from the alternative investment is a more viable option. Real Estate Crowdfunding is a way of raising money for real estate investment by reaching out of the pool of investors to contribute a small amount of money towards a project. Real estate crowdfunding is also referred to as real estate peer-to-peer lending or financing of real estate projects. The Process of raising money is conducted via an online crowdfunding platform.
Real Estate Crowdfunding was started in the year 2020 in India. One of the reasons to find crowdfunding due to the coronavirus pandemic, there is the decline in the value of the real estate project and creating opportunity for individuals to invest in the commercial project. There are many investors with cash-rich, they had money to spend and invest in the property. As an investor, to be successful with real estate cloud funding, it’s required that you should select the right crowdfunding platform. By using crowdfunding to make a real estate investment, you will get profit to access a wider range of real estate markets with only a small amount of money. Some popular platforms like, realty mogul, origin investment, fundraise,
Advantages of crowdfunding
- Portfolio diversification:-
In crowdfunding investment, you can minimize the risk that comes with making a singular investment by spreading that risk across numerous investments. If one of your investments happens to fail, your investment portfolio will spread across numerous investments. Example: You invest Rs. 1 Crore in Investment A, or Invest the same amount in Various Projects like A, B, C, D, E. If you invest only A and if the project will fail then you lose the entire money ( i.e., 1 Crore). But if you invest equally in projects A, B, C, D, E then if A will fail then the other four will balance the or you will lose only 20 lakhs. Portfolio diversification is one of the notable benefits in real estate crowdfunding. Portfolio diversification minimizes the risk of the investor.
2. AccessibilityÂ
Engaging in real estate investing has been made much more accessible with Crowdfunding, Private real estate investments were once only available to high-net-worth investors who had the capital and connections that were needed to access the investment. The entry point for the real estate investment market is much lower than it’s ever been.
3. Geographically diversificationÂ
In Real Estate Crowdfunding investments invest in different geographical locations. Every area provides a different return, many areas give very high returns and many areas provide very little return. The real estate market in one city may be healthy, it is possible that the market in another location could experience a significant downturn.Â
If you invest all your money in one location, it may possibly give a negative return on investment, but if you invest in real estate crowdfunding you will issue a broader market, and you will have options where to invest.
4. Passive Investment Vehicle
Passive investing refers to a buy and hold portfolio strategy for long-term investment horizons, with minimal trading in the market. Index investing is perhaps the most common form of passive investing, whereby investors seek to replicate and hold a broad market index or indices. Passive investment methods seek to avoid fees and avoid frequent trading. The passive investment will create wealth gradually.
This is one of the attractive aspects of investing in real estate crowdfunding that is a passive investment vehicle, as contrasted to more traditional real estate investment vehicles, such as direct ownership.
For the people who make traditional investments, generally will need to spend considerable time managing the property to make sure that it’s developed on time and according to specifications and bear all the associated risks. With crowdfunded real estate investments, you are investing with a third-party real estate developer or operator who does all the work. You are trusting that the developer will do all of the required work on time and on budget. You do not need to deal with the frustration of managing the property.Â
5. Small investment Size
Real Estate Crowdfunding provides you with the opportunity to become a real estate investor because of the small investment size requirements. Many Crowdfunding platforms allow potential investors to make an investment of as little as Rs.10000/-. Investors need not to invest Lakh or crores that would more typically be required to purchase a property to invest in real estate. The smaller investment amount also allows you to “tip your toe in the water” if you are new to real estate investing or achieve greater diversification. In traditional investment in real estate, you require to invest 40 to 50 lakh depending upon the city to city and area and location.Â
Disadvantages of the crowdfunding
- Lower Relative Return:-
As compared to other assets like Equity Market, Gold Market, and debt market, many times real estate investment provides hardly 4 to 5 percentage return or many times it will provide a negative return. It purely depends upon the project size, location, and market condition.Â
2. Illiquid Investment:-
One of the most disadvantages of Crowdfunding in real estate is you cannot exit where you want to be. There is a certain locking period in the funding. While other assets like Equity, Gold, and Debt securities are sold wherever you want money.Â
Investors of crowdfunding will hold a significant amount of time and that may cause the value of the property to drop over time. If an emergency occurs, it could be impossible to cash out on the investment.
3. Lack of control:-
A more traditional form of Investment provides investors with the ability to manage the project. While you invest in Crowdfunding you cannot control the investment. Once you make the investment with crowdfunding, the developer of the property will manage the property.Â
How to invest in crowdfunding in Real Estate?
If you want to invest in crowdfunding, then first you will select the crowdfunding platform and join. Each Crowdfunding requirement is different from each depending upon geographically are focused. One of the principles that should consider while investing in crowdfunding is minimum investment. Many Crowdfunding provides investment Rs. Minimum Rs. 5000/-. Most crowdfunding platforms provide you with the ability to put money into equity or debt instruments. In an equity instrument, you will receive a stake in the property directly. Inequity instruments, return on investment, to share the rental income or profit on selling the property. In a debt instrument, you will be placing your money into a loan. These loans are typically secured by the underlying real estate serving as collateral and will be repaid with interest on monthly, quarterly, or yearly depending upon the contract or agreement between the parties. You have to select the right platform. Remember, each crowdfunding platform is different. While you select crowdfund in real estate make sure that that platform will invest in different projects to mitigate the risk of investors rather than invest in one project. You have to understand the terms and conditions and the locking period. Generally, the locking period is between 1 to 10 years.
Split by investment purposeÂ
- Â To Let out Property:-
The purpose of this type of investment is to purchase a property specifically to let out or for rent out. The property once bought will be renovated to increase its attractiveness towards renters.
2. To sell out the Property:-
The purpose of the investment is to gain out of the selling property at a higher price. Usually, profits are made to renovate the assets and sales of the renovated asset at a higher price.
3. Development Loans :
The purpose of the investment is to finance the construction of a new building with the purpose of either sell it out or make it a rental income from the property. Investors will get a fixed rate of interest on the amount invested.
The best real estate crowdfunding sites of 2021
- Best Overall: https://www.crowdstreet.com/.
- Best REIT Option: https://diversyfund.com/.
- Best for Institutional Commercial Real Estate:https://www.equitymultiple.com/.
- Best for Beginners: https://fundrise.com/https://fundrise.com/.
- Best for Investing in Loans: https://www.peerstreet.com/.
- Best Property Research: https://www.realtymogul.com/.
Conclusion
Crowdfunding is a new concept to invest in property with a very small amount. In Every new concept, there is some loophole and many times the investor is not aware of that, so it is the duty of the crowdfunding platform to show the risk factor and history of the promoter of the project. In India, there is a regulator like SEBI, IRDA to protect the interest of the investor. Real Estate Crowdfunding is not for everyone. It is important to understand the advantages and disadvantages.
References
- https://www.millionacres.com/real-estate-investing/crowdfunding/real-estate-crowdfunding-good-investment/.
- https://andersonadvisors.com/real-estate-crowdfunding/.
- https://www.investopedia.com/articles/investing/072514/real-estate-and-crowdfunding-new-path-investors.asp.
- https://www.moneyunder30.com/should-you-invest-in-real-estate-crowdfunding.
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