Crowdfunding: A New Path For Property Investors

Investors are always looking for a new ways to diversify their investments. Sometime it can be hard for investors to find the right type of investment that is aligned with their financial capacity and risk appetite.

Financial capacity and risk appetites may differ for a different group of people. This is especially important when an investor is thinking of investing in real estate. Real estate investments can fall into two categories which are the traditional approach and a more modern approach called crowd-funding.

In recent years, crowdfunding has been on the rise and is considered an alternative real estate investment method. Regional countries such as New Zealand and Saudi Arabia have placed crowdfunding as a real estate vehicle and have successfully raised NZD7.677 million and USD8.55 million respectively in the last 12 months. Other countries are following suit with the likes of Taiwan, Singapore, Australia, India and Malaysia. Malaysia entered crowdfunding bandwagon in September 2015.

Traditional real estate investments consist of a few different types of methods including the direct approach, network approach and through REITs. Direct approached requires investors to find the property to be invested directly. This is not suitable for a casual investor. Selecting and acquiring the right piece of property takes a great deal of experience and skill that a casual investor lacks.

The investor has to have a strong financial capital to purchase the property. This takes time, money and a lot of effort especially when the property is acquired. Maintaining the property after its acquisition is no easy feat in itself. The expected and unexpected cost in maintaining the property may burden casual investors that lacks the knowledge, capital and time to handle the situation. Most investors prefer not to commit too much to a single investment as it will deter their other investment opportunities.

Sometimes, rather than finding and purchasing the property directly, investors tend to rely in their social networks through their associates or trusted agents’ word of mouth to acquire real estate investments. These investments can vary from acquisitions to developments of particular properties or to some extent, development companies. This approach has several advantages over the direct approach as the investors can rely on the skills of others to identify good properties and to handle the property after its acquisition.

Another advantage is that the investor’s commitment to the property is limited to the initial investment. This approach is best for the investors that have an expansive network and a substantial capital to invest. It is not viable for the casual investor with limited capital and lack proper network in the real estate industry.

The third traditional approach for investors is to invest in Real Estate Investment Trust (REIT) vehicles. A REIT is an entity that raises capital from investors in order to invest in a portfolio of real estate investments that yields rental returns. The REIT’s portfolio usually consists of commercial elements such as offices, retail malls, and hotels. In a REIT, investors do not have a say on the assets acquired by the entity.

An investor essentially invests their money with the entity and relies entirely on the expertise of the REIT’s fund manager to select, acquire, hold and operate the real estate assets. A plus point on REIT investments is that the initial capital investment is less than the ones required in the direct and network approach. The downside of REIT is that investors do not know upfront what real estate assets the entity is selecting for investment in. The investors are only informed when an acquisition is made with the predetermined criteria set by the REIT’s fund manager.

Crowdfunding is relatively an alternative and new way to invest in real estate. It basically involves raising the necessary capital for a particular real estate investment or project from the ‘crowd’ of investors rather than one or a selected few using the traditional approach. This crowd-based approach to real estate investment combines many of the favorable advantages of traditional approaches with the perks that casual investors can access.

Similar to the traditional direct approach, crowdfunding investors know exactly what property or project they are investing in, unlike REIT and some network approaches. This becomes a selling point and draws the investors who value the knowing where and what they are investing in. Furthermore, seeing the actual investment property is often a source of confidence to the investors.

Crowdfunding investors are able to enjoy the benefits of ‘direct’ ownership of the property via cash flow income, capital appreciation etc. without the substantial capital costs and time required in maintaining a property as in the direct approach.

The network and REIT approaches also involve the pooling of assets from investors; however, there are two distinct benefits of crowdfunding approach for the casual everyday investors. Firstly, the initial capital investment is often significantly less than most of the traditional approaches. This not only makes real estate investment accessible to the casual everyday investors with limited capital but allows them to both limit their overall financial exposure and to diversify their investments more easily.

Secondly, crowdfunding provides the casual investors access to private real estate transactions that were traditionally reserved for high net worth individuals or investors with an expansive network. Thus, there is no longer a barrier for the investors to invest in real estate. There are two types of crowdfunding which are equity-based crowdfunding and debt-based crowdfunding. These types of crowdfunding will be discussed in the upcoming Property Quotient.

There are several advantages to crowdfunding over the traditional real estate investment methods. Crowdfunding allows investors to have control over their investment choices prior to investing their money on a particular property and the property’s acquisition. Lower initial capital investment and lesser time spent on sourcing, operating or maintaining an invested property, thus limits their liability on the said property. This is especially appealing to the casual investors.

Due to the low initial investment costs, the investors are also able to diversify their property investment portfolio and minimize their investment risks while attaining a higher expected rate of return on their property investment portfolio and minimize their investment risks while attaining a higher expected rate of return on their investments in comparison with their initial investment.

The investors are also able to leverage on the expertise of other professionals that have the experience and the knowledge on these types of investments. The investors are able to access a wider range of property transactions including the private transactions usually reserved for high net worth or well-connected individuals.

Crowdfunding is categorized as a passive investment with limited liability. With every investment regardless whether it is in stocks, bonds or real estate, there are bound to be risks involved. The same goes to crowdfunding.

According to some investment experts, crowdfunding is used by property developers and managers that are unable to gain access to the traditional form of funding due to certain reasons such as that venture may be too risky, or that they are part of a new start-up or lack the experience. There are general concerns of fraud.

To avoid this from happening, do ensure that the crowdfunding platform is registered and listed with the country’s securities commissions as crowdfunding platforms and activities are being regulated and monitored by the country’s securities commission.

Investors should do their due diligence and thorough research on the potential investment property, surroundings and the parties involved before investing. Investors should take advantage of the educational materials offered by crowdfunding platforms and the information on the wide web to enhance the knowledge before investing. Wee-researched investors could be well rewarded with high returns depending on the investments made.

Real estate has always been a favourite form of investment for the wealthy due to the overall stability of the property market and its potential for high returns, especially for long-term investments.

Over the years, more and more people have started to realise that real estate is the source for a stable long term investment and its proven high rate of return makes it even more enticing to the investors. However, not everyone has the same capital income or are willing to fork out too much of their money for real estate investments as the initial capital needed for real estate investments can be quite substantial. Thus, traditional real estate investment method may not be able to facilitate some of the investors.

In the future, we will be able to see a shift in the way people invest in real estate. The traditional methods will still play a role in real estate investment, but we can also see that the new crowdfunding platforms will change the real estate scene and play a bigger role particularly with passive investors and the casual investors that have limited initial capital.

Visit our new launches page to find the new launch project of your dreams and submit an enquiry today.