The outbreak of COVID-19 has had a significant impact on real estate investments. Several institutional quality investment plans have temporarily halted during this phase. However, the advent of real estate crowdfunding benefits both sophisticated as well as boutique investors. Hence, they can get their unfinished projects rolling in full swing.
In this blog, we will illustrate the aspects of Real estate crowdfunding. We will also discuss how it impacts the real estate investment scenario, including its post-Covid prospects.
What is Real Estate Crowdfunding?
Simply put, Real Estate Crowdfunding, refers to the strategy of raising money for Real estate businesses and projects from multiple sources.
The sponsors of large real estate projects often utilize social media platforms to reach out to potential investors. Thus, Twitter, Facebook, and LinkedIn posts and advertisements have become the medium to reach out to myriad real estate investors. These investors are willing to invest small amounts each in these real estate deals.
Crowdfunding enables companies to access huge capital that they can never afford individually. Consequently, it also offers investment opportunities to become property shareholders. Through crowdfunding real estate investment, they can also own certain shares of a single huge real estate property. In such cases, they need not purchase it entirely.
The Jumpstart Our Business Startups Act (JOBS Act) permitted small and medium-sized enterprises to benefit from crowdfunded financing. Furthermore, The Securities and Exchange Commission (SEC) also allowed non-accredited investors to participate in crowdfunding, with certain restrictions.
Overall, the global real estate crowdfunding market is estimated to reach $9 billion by 2021.
How does crowdfunding work in real estate?
The working of a crowdfunded real estate is closely associated with ‘equity transactions’. In the equity investing process, companies increase the number of investors for raising capital. Hence, it is in a way, a lot similar to pooling.
Therefore, equity investing collects money with a vision to assist small and medium-sized real estate businesses. Furthermore, they utilize these funds to secure the company’s future prospects.
It is observed that various real estate businesses furnish themselves with crowdfunded financing. While some secure additional equipment, others relaunch or start fresh with newer manufacturing prospects.
Besides, each investor in equity investments receives some amount of cash flow from rents. Furthermore, when the property is sold off, the investors receive much higher returns as the property appreciates over the years.
Are there any investment limits for real estate crowdfunding?
To avoid confusion, the SEC has imposed important investment limits for regular investors. As a result, it would allow the smooth flow of the procedures among the businesses and their investors.
· For net worth less than $107,000
If the annual income or the net worth of the investor does not exceed $107,000, then during any 12-month period, they can invest up to the maximum amount of either $2,200 or 5% of the minimum of their annual income or net value for that year.
· For net worth that exceeds $107,000
If both the annual income and the net worth of the investor are equal to or exceed $107,000, then during any 12-month period, they can invest up to 10% of annual income or net worth, either of which is lesser, but not to exceed the summation beyond $107,000.
What is the current state of Real Estate crowdfunding?
Initially, real estate crowdfunding platforms limited their opportunities to investing in physical properties or real estate investment trusts (REITs).
However, in recent times, it has opened the gates to more revenue and newer scope for investors. As a result, they can generate higher cash flow from renting the buildings or estate. Further, the investors also receive the proceeds from the sale of the property.
One of the larger benefits of real estate crowdfunding is for non-accredited investors. Such investors can invest in real estate with lesser investment minimums. Hence, they can enter the real estate market with lesser investment amounts. Furthermore, they can eventually become legal shareholders of larger estate businesses or property.
Crowdfunding in real estate enables investors to earn over $5,000.
Why is real estate crowdfunding expected to boom in the post-COVID era?
- Despite its adverse impact, COVID-19 has created new areas for advancement in the real estate industry. Investors play the most crucial role in the real estate investment ladder. Hence it becomes essential to enhance their chances of profits, which will in turn, drive the industry forward.
- In these uncertain times, real estate investors are actively pursuing multiple investment options over traditional investments. Therefore REITs and crowdfunding allow both institutional and smaller investors to diversify their portfolios across various asset classes. These include multi-family properties in prime locations and industrial and logistics centers.
- A historically low-interest-rate environment is also beneficial for fuelling the demand for crowdfunding in real estate.
- Real estate crowdfunding and crowdfunded estates allow newer sponsors in the industry to access profitable projects. Therefore, they replace lenders who slowed down the origination procedures.
Crowdfunded real estate has traditionally yielded stable returns. Hence, it seems that crowdfunding will create a sharp inflection point in the growth curve of the market. This is all set to lay the foundation of crowdfunding in real estate when the pandemic subsides.
Several websites and applications have been on the rise that is keen to undertake crowdfunding. Moreover, these platforms implement the idea of collaborative crowdfunding on a real-time active basis.
Some developments in crowdfunding that are expected to skyrocket the idea to an unforeseen scale in the future, include:
1) Investment Crowdfunding: It is a concept that centers around becoming a shareholder in a real estate asset.
2) Localization: This refers to funding that focuses on participants in specific cities, posh colonies, and neighborhoods. Localization entails several flexible collaborative group-based solutions and mobile approaches.
Where is crowdfunded real estate headed post-COVID?
Real estate investments are on the rise on both national and international levels. Therefore, crowdfunding can serve as a breakthrough for both smaller and accredited investors with its flexible approach. Real estate crowdfunding opens the gates for diverse opportunities at affordable rates. Hence, a broader base of investors can seek direct exposure to real estate assets and reap stable returns.