Crowdfunding - This new method of capital raising has developed rapidly since its birth, sweeping across multiple industries in a short period of time.
Advantage of crowdfunding lies in making it easier for companies in urgent need of capital to obtain capital, while lowering the investment threshold so that ordinary people can also become investors. It is conceivable that when crowdfunding meets the ancient and traditional real estate industry, the outcome is amazing.
After more than two years of development, the US real estate crowdfunding market has formed a relatively complete development system and operation process. Several large real estate crowdfunding platforms have achieved relatively stable investment returns. In 2013 alone, the US real estate crowdfunding platform raised more than 100 million U.S. dollars for hundreds of real estate projects across the United States. Currently, the leading real estate crowdfunding platforms in the United States include Fimdrise, Realty Mogul, and RealCrowd.
Take Fundrise as an example. After the JOBS Act was passed, Fundrise was established in Washington in August 2012. The founders were Benjamin Miller and Daniel Miller brothers. According to the Miller brothers, there are two major problems in the real estate investment field: First, private equity investors do not understand the real needs of community residents, and the things they build often do not match the needs; second, the existence of middlemen will reduce investors’ income.
According to the explanation in the US Act, "crowdfunding" means that financiers use crowdfunding platforms on the Internet to raise funds for their projects from a wide range of investors; and each investor obtains from the financier through a small amount of investment. Return in kind or equity. Like microfinance, "crowdfunding" is first and foremost a financing activity. However, similar to crowdsourcing, investors not only raise funds for the project, but also actively participate in the implementation of the project and make suggestions for it in a considerable part of "crowdfunding" activities.
Fundrise's operating model is as follow: Developers can list commercial real estate projects such as hotels, apartments, and other commercial real estate projects on Fundrise. Investors can purchase shares in real estate projects as needed. The investment scale starts from a hundred dollars. According to the proportion of investment, investors can profit from the income from the sale of real estate. They can also get a certain percentage of housing rental income. It is reported that each investor can get an average return of 12% and 44%.
According to data released by Fundrise, currently Fundrise has launched about 36 real estate "crowdfunding" projects with a total value of 15 million dollars and more than 1,000 investors participated.
So how should this investment method operate?
Investors invest in an equity/debt "crowdfunding" project through the "crowdfunding" platform, which is equivalent to investing in a real estate project. However, but if an investor invests in a real estate fund through "crowdfunding", it is equivalent to indirectly investing in the real estate fund. Investment in multiple real estate projects, similar to investing in a portfolio of multiple real estate projects, has more diversified risks. Real estate funds often have a more successful real estate projects, a better track record, and a more matured investment team.
Some Crowdfunding Research Reports pointed out that real estate funds can provide better liquidity than a single equity/debt crowdfunding project. However, the real estate fund cannot provide a single investor with the status of each real estate project in a timely manner due to the investment in multiple real estate projects. Equity / responsibility crowdfunding projects can provide better transparency and control. Investors can check on the progress of the real estate project in a timely manner.
From the perspective of risk and return, investing in real estate funds is riskier than investing in debt crowdfunding projects. Because investment income is related to the performance of real estate funds, investors have to bear the risk of performance decline caused by the depreciation of real estate projects invested in real estate funds. Accordingly, investment in real estate funds may gain greater returns than debt crowdfunding projects. Investors can share the gains from the increase in the performance of the real estate fund due to the appreciation of the real estate projects. Compared with investing in equity crowdfunding projects, the investment risk of real estate funds is relatively small. Investing in real estate funds is equivalent to invest in multiple real estate projects indirectly rather than invest in a single real estate project. The risks are diversified. Correspondingly, the potential investment income is also less than the investment Equity crowdfunding real estate projects.
Experts warn that real estate "crowdfunding" projects are an emerging field. Investors should conduct sufficient research before investing. The Wall Street Journal reported that Sherwood Netss, co-founder of Crowdfund Capital Advisors (an investment consulting firm), believes that "real estate crowdfunding is inherently a high-risk investment method." He suggested that investors only invest a small portion of at start. Pay attention to the past performance of the operators of such projects. "Have they had any successful experience before? Who is more knowledgeable? Check the information previously disclosed. Don’t invest simply because there is an opportunity."
Rodrigo Nino, CEO of Prodigy, said that investors should ensure that their funds are placed in a third-party custody until the project is fully funded. Not only that, but the project operator should also be required to issue a complete list of all transaction related parties. "If I let my nephew be a builder and my wife is a hotel operator, there must be a problem."
Finally, investors should also understand the exit strategy because some assets may take a long time to sell. Even if the promised rate of return can be achieved, "There is still risk whether you can finally achieve your goal or not."