Real Estate Crowdfunding provides individuals with the opportunity to invest and receive passive income in real estate, one of the oldest forms of investment that has demonstrated a long history of consistent capital growth.
Crowdfunding in real estate means a number of individuals (“Investors”) combine their money to purchase a real estate property with a Real Estate Crowdfunding Platform (“Platforms”) that hire real estate professionals (“Sponsors”) to achieve the goals of income generation and/or capital growth. Investors have a lot of factors to consider when investing in real estate, let’s walk through step-by-step.
This article’s purpose is to explain the key considerations of Real Estate Crowdfunding so that Denzity users understand how to decide on a Real Estate Crowdfunding investment (“Project”).
How much to invest in Real Estate Crowdfunding?
Investors decide exactly how much they invest into a Project, regardless of the underlying real estate property’s value. Each Investor receives an ownership (in the form of shares) proportional to how much they invest — this is fragmented ownership.
For example, an Investor commits US$50,000 to a Project where the underlying property is valued at US$1,000,000 and generates net income of US$100,000 per year. The Investor’s fragmented ownership is 5% of the Project and would receive US$5,000 in passive income (5% of the property’s US$100,000 net income). In comparison, traditional real estate investment would have required the Investor to commit around US$200,000 and be liable to pay a mortgage payment every month, as a mortgagor.
Where to invest in Real Estate Crowdfunding?
Investors decide which real estate market to invest, usually based on the Platform’s expertise and investment objectives. Each property type (e.g. residential versus hotel versus office) requires specific knowledge held by real estate professionals to match the property’s net income and value with the Investor’s investment objectives.
Investors would typically select a developed real estate market (New York or London, for example) where rent is generated in a commonly held currency (United States dollar, British pound) to generate stable passive income and capital appreciation. In contrast, Investors seeking large capital appreciation would seek an emerging real estate market for long distance real estate investing like Vietnam, for example.
Which type of real estate property to invest in?
Investors decide which type of real estate property to invest and obtain fragmented ownership in a Project, for example, a residential home, office building, or industrial warehouse.* Each real estate property has different characteristics and Investors should decide based on their individual investment preference for risk and return.
*We will talk more in-depth about the various real estate property types in the future.
Which Platform should I invest in Real Estate Crowdfunding?
Platforms will typically be focused on a certain real estate market geography and type of property. As a result, Platforms will hire a team of real estate professionals with specialized knowledge in its focus areas. As an Investor in a Project, the Platform provides you with fragmented ownership but has sole discretion in operating and managing the Project.
Investors should decide whether to proceed with a given Project having made careful consideration of the Platform’s track record and reputation. Denzity provides users with the relevant information to make an informed investment decision on Projects and Platforms.
How long should I invest in a Real Estate Crowdfunding Project?
Each Project will have a different investment (time) horizon. While equity crowdfunding (usually 3–5 years) is typically longer than debt crowdfunding (usually 2–4 years) it can provide a higher return to investors (around 5–15% for equity vs. 7–10% for debt crowdfunding). Based on the investment horizon, Investors can decide how much to invest in any given Project.
In conclusion, each Investor can decide exactly how much to invest in any given Project with consideration to the Platform’s track record and reputation towards achieving passive income and capital appreciation through fragmented ownership in Real Estate Crowdfunding.
What’s up next? Denzity will cover the various types of real estate properties available for investment and highlight the considerations each investor should make before investing.