Real estate crowdfunding: what is it and how to get started
Jan Večerka (below) is chief executive and founder of BrikkApp, a Europe-based company that connects investors with property investment platforms from across the world
You don’t need to fully own something to enjoy it. That has become the mantra of the sharing economy – a model that has had a seismic effect on how we think about ownership. But the sharing economy has not only transformed practically all industries; it has also irreversibly rewritten the rules of investing.
In the face of the digital revolution and the growing popularity of peer-to-peer exchanges, investment has become much more transparent and inclusive than ever before. The elimination of the middleman along with our need to be in greater control has secured the unprecedented success of crowdfunding platforms.
However, there’s one branch of crowdfunding investment that remains relatively untapped: real estate. With the potential to reach $300bn in volume by 2025, it’s considered the fastest-growing field in crowdfunding.
As this exciting field rapidly expands, more and more people are looking to get into real estate crowdfunding. So what should they know before getting started?
The main benefits of real estate crowdfunding? Low risk and inclusivity.
Real estate crowdfunding first appeared in 2012, after the US JOBS act went into law. This legislation permitted crowdfunding platforms to raise up to $1m in funds annually from high-net-worth individuals and accredited investors. While the Washington-based platform Fundrise was the first pioneer, an avalanche of platforms soon joined the party – and for good reasons.
The charm of real estate crowdfunding lies in the option to invest relatively small amounts of money into bigger real estate projects. With its low-risk ventures and secure returns, this type of crowdfunding democratises access to quality investment. Traditionally, only wealthy individuals could invest in real estate. Now crowdfunding brings this option to everyone, be it a person in their 20s, a middle-class family hoping to increase their net worth, or even retirees looking to secure their nest egg.
Real estate investment is lucrative all around the world, but inexperienced investors might have to face many challenges. For example, when buying an investment flat, they could end up choosing “the bad apple”, and buy an overpriced apartment, one with hidden faults, or a property located in a difficult location. They would also still need to manage their tenants. Real estate crowdfunding, on the other hand, mitigates both the risk and hassle.
Crowdfunding allows anyone to invest small amounts in bigger projects, allowing for easy portfolio diversification. Investors are constantly empowered by data: They receive regular updates on their dividends or interests – profits that are made through rental, property appreciation, and sale. And at the end of each project, they receive their initial investment back.
How is real estate crowdfunding different?
It’s also important to understand that real estate crowdfunding is unique, both in terms of traditional real estate investing and crowdfunding itself.
When it comes to investment funds, the main difference is in the level of proximity. Crowdfunding provides a direct relationship, guaranteeing that investors know where they are investing, in what specific property, and the expected returns. Investment funds also swallow a lot of management money, which normally takes away a fragment of investors’ margins. However, crowdfunding only runs on low fees and offers a way more efficient and flexible management model.
Within the broader context of crowdfunding, the real estate branch offers actual investment and returns. Normally, crowdfunding of entrepreneurial ideas usually offers the reward of the product itself or shares in a company that can take years to monetise. The main decision factor is the investor’s trust in a specific idea and its viability on the market. However, real estate crowdfunding is based on data-driven projections and actual hard numbers that empower investors to choose what’s best for them.
I would argue that real estate crowdfunding brings the best out of both worlds: transparency with a personal feel, but also hard data and safe returns. It provides trust on the personal level by ensuring investors have the information they need to make the right real estate decisions.
Learning is a part of the process
So now, only one question remains: How to get started? Before plunging in, beginners should know that they are unlikely to log in to a platform and become multi-property investment tycoons overnight. Learning the ropes of real estate crowdfunding takes some time and requires both dedication and patience.
While there is no single platform for learners per se, it’s recommended to get started on one of the well-established ones. They often have more developed dashboards and online environments, making them more user-friendly. It’s useful to test out a few platforms to see which one is the best fit for individual preferences. However, a beginner investor should also look at those offering secondary trading, which allows investors to sell their investment before the maturity date in case they need to.
As campaigns range from $100,000 to over $25m, learning about different budget sizes and investment types is also essential. Understanding the distinction between equity and loan investment can be of great help. For example, investors may find that lending projects are usually low risk but also offer lower returns, making them ideal for first investments. No matter what, the golden rule is that beginners should invest smaller amounts in bigger projects, in order to avoid putting all their eggs in one basket.
First-time investors should also learn to pay attention to details. Even when a project looks promising, there are some indicators to watch out for. One of them is the project location. Inexperienced investors should always choose established regions. While interesting projects in developing countries could bring a huge fortune, due to their greater potential for risk, they often require a skilled eye.
Just over the last year, real estate crowdfunding has grown massively. And with various regions, currencies, types of projects, and platforms to choose from, it’s important that investors don’t lose their heads and instead maintain a strategic and patient approach to this growing industry.