Real estate crowdfunding involves the pooling of funds by multiple investors in a real estate development project. It’s a simple process which involves various online crowdfunding platforms helping connect real estate developers struggling to raise capital through traditional sources with investors looking to diversify their portfolio while looking for a long-term source of income and a less risky way to invest in real estate.
It is a new industry and is very different from rewards-based, venture and loan crowdfunding in terms of how investments are made, the kind of potential returns investors earn, and the level of risk involved. There are two ways in which investors can participate in the real estate market:
Equity Investments. Under the equity scenario, in exchange for the funds contributed by the investors, the investors receive an equity stake in the property. Returns generated by these properties are realized in the form of an equity share of the rental income received by such investors on a quarterly basis.
Debt Investments. Under the debt scenario investors put their funds in a mortgage loan associated with a real estate property. It’s a form of loan to the real estate developers. The “loans” are repaid with interest, a percentage of which is then paid to each investor participating in the deal. Such payments usually occur monthly or quarterly.
Equity investments are observed to offer a higher return when compared to debt investments. Equity investments offer annualized returns ranging from 18% to 25%, whereas debt investments annualized returns are capped at 8% to 12%. This is mainly due to the fact that the profitability of debt investments are limited by the interest rate associated with the loan. On the other hand, equity investments carry a higher risk with a longer holding period making them less liquid.
Like any other investment opportunity, crowdfunded real estate comes with its pros and cons. It is fair to say that it has established itself as a major game changer by democratizing the investment process and is gaining traction. It has brought about positive disruption by introducing tech-based solutions and has helped overcome the barriers to real estate investing. It will be interesting to see how this industry evolves in the years to come.
Akshat Bhargava contributed to this report.
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