Traditionally landlords work as solo investors, managing portfolios in a well honed and time honored way, yet a small but growing section of the market have slowly started to disrupt the established buy-to-let model.
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors by tapping into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure. Crowdfunding platforms give the entrepreneur a single platform to build, showcase, and share the pitch with potential investors. With crowdfunding, it’s much easier for you to get your opportunity in front of more interested parties and give them more ways to help grow your business, from investing thousands in exchange for equity to contributing $20 in exchange for a first-run product or other reward.
Crowdfunded buy-to-let has ignited interest among investors who want a slice of the property market but lack the capital to create their own portfolio. The rise of crowdfunding has been accelerated by people’s distaste with the banks. By taking power away from the institutions and giving it back to the people there becomes a democratising on the way people can invest. Property as an investment is a tangible asset that everyone understands and can put a value to, and as such lends itself well to the crowfunding model.
Crowdfunding opens up the market to everyone so they can invest in property for a much-reduced commitment. It allows people to diversify across asset types and geographic areas, helping to spread risk and, hopefully, increase returns. There are also the benefits in allowing low-level investment and providing the opportunity to spread investment risk. These however lead to potential problems getting in and out of an investment.
Real estate has long been a favored investment class due to its hands on quality. And those who have raised funds for a venture or invested in somebody else’s, will know that developing a single property can be a tough, high-risk affair. Brokers tend to keep their best deals off-market and close to the vest, ensuring insiders win them. When the market moves strongly in one direction, novice investors are often completely shut out. Crowdfunding may offer a potential opportunity for property novices who wish to start their investment journey.
Investing with Crowdfunding
Property Investment may not seem like the obvious choice for crowdfunding at first glance. While a few crowdfunding projects have raised more than $10 million, most attract a small number of investors and earn just a few thousand dollars.
The crowdfunding industry at large, though, seems to practically double in size every year. According to Crowdsourcing.org, the total funds raised grew from $2.7 billion in 2012 to $5.1 billion in 2013 to an estimated $10 billion in 2014. The portion of that likely to go to real estate is small but growing. Landlords and developers are turning to crowdfunding because banks or other traditional financing sources have turned them down.
Crowdfunding opens up the market to everyone so they can invest in property for a much-reduced commitment. It allows people to diversify across asset types and geographic areas, helping to spread risk and, hopefully, increase returns.
Buying into a property investment, which ranges from renovations to distressed debt, groups you in with the other funders. In most cases the deals require a hold of three to five years with annualized returns of around 10 to 30 percent. The crowdfunding platform organizes you as single limited-partner entity, which the platform manages. Deals are vetted and sponsorship documents are negotiated in advance and on a deal-by-deal basis. Once the strategy is set, the particular investments to be acquired are usually identified in the offering.
If you’re an individual investor looking for a tried and tested investment method, then a well-managed REIT may be for you. If however you like the idea of getting involved in property with a modestly sized commercial or multifamily investment and you’re an accredited investor, crowdfunding may be the game for you.
By Katherine Jones