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 favoured 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.
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.
THE BENEFITS OF CROWDFUNDING
From tapping into a wider investor pool to enjoying more flexible fundraising options, there are a number of benefits to crowdfunding over traditional methods. Here are just a few of the many possible advantages:
- Reach – By using a crowdfunding platform like Fundable, you have access to thousands of accredited investors who can see, interact with, and share your fundraising campaign.
- Presentation – By creating a crowdfunding campaign, you go through the invaluable process of looking at your business from the top level—its history, traction, offerings, addressable market, value proposition, and more—and boiling it down into a polished, easily digestible package.
- PR & Marketing – From launch to close, you can share and promote your campaign through social media, email newsletters, and other online marketing tactics. As you and other media outlets cover the progress of your fundraise, you can double down by steering traffic to your website and other company resources.
- Validation of Concept – Presenting your concept or business to the masses affords an excellent opportunity to validate and refine your offering. As potential investors begin to express interest and ask questions, you’ll quickly see if there’s something missing that would make them more likely to buy in.
- Efficiency – One of the best things about online crowdfunding is its ability to centralize and streamline your fundraising efforts. By building a single, comprehensive profile to which you can funnel all your prospects and potential investors, you eliminate the need to pursue each of them individually. So instead of duplicating efforts by printing documents, compiling binders, and manually updating each one when there’s an update, you can present everything online in a much more accessible format, leaving you with more time to run your business instead of fundraising.
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.