Crowdfunding in Real Estate Investments
Let us now learn about the Real estate Market and how it is benefitting through crowdfunding as a form of investment.
Real Estate was dominated by investors with deep pockets. This included universities, corporates, pension funds and insurance companies. Individuals with smaller investor muscle could simply never imagine themselves in this space. Real estate was a housing option. Thanks to crowdfunding small investors with an interest and appetite for real estate can now think of getting a bite of this lucrative market.
This was enabled by the JOBS Act or the Jumpstart our Business Startup Act of 2012 that encouraged funding of small businesses by easing securities regulation. This resulted in small to midsize companies using crowdfunding investment to create assets.
Crowdfunders could now participate in projects that they could not have otherwise on their own. Now hundreds of investors can crowdfund a project and it works like a private equity investment. The funds directly go to the sponsor who can then build, renovate or refinance their residential or commercial property. Investors advance the funds without taking the operational load of the project.
An investor who puts her money in an REIT, Real Estate Investment Trust is bound to the choices the trust has made. In Real Estate crowdfunding, the investor is free to put their funds only in projects of their choice.
Crowdfunding investors do not need clout or connections to get into a deal. They can compare projects across various crowdfunding projects before parking their funds. Furthermore, investors can interact with the sponsors and ask for updates.
Real Estate crowdfunding projects involve smaller fix and flip residential projects. Larger commercial real estate projects are often open to accredited investors only. In both cases, investors get a portion of the profits from rent or sale of the project. Payments may be made on a monthly, quarterly or annual basis.
Different real estate projects have varying rates of risk. Commercial projects usually take the sale road, and the sponsor will earn a good profit a few years later, provided it goes as per the forecast. Investors can also invest in fully-leased properties in major metros, with more immediate payouts.
Real estate crowdfunding represents 25% of the crowdfunding market, as of today. Deals worth $15billion were made in 2020 in America. A large and important player in this market is CrowdStreet, which has raised $2billion in equity from individual investors. Covid-19 has disrupted the global economy in myriad ways. Crowdfunding has only grown in popularity and size in the pandemic. If it continues its current growth trajectory, financing of the real estate sector could be changed forever.