In recent years, crowdfunding has emerged as a popular financing mechanism that allows for various types of projects to get funded, from one-time events to starting up small companies. By 2020, a total of $34Bn was raised through crowdfunding owing to the rise in online platforms specialized in growing the industry each year.
Contrary to popular belief, crowdfunding is not a new concept, as it dates back to the 1700s with the establishment of the Irish Loan Fund which provided loans to poor but creditworthy people in Dublin. Particularly in the 20th century, the mechanism started gaining traction. Around that time, in 1997, the first successful instance of modern-day crowdfunding as we know it was recorded when a British rock band had expressed they would lose money if they were to tour the US.
And, it all started with one email! The band’s keyboardist had emailed around 1,000 of their loyal fans with a message that the band would lose out on $60,000 if they toured. That’s when their passionate fanbase decided to raise the amount themselves. A few years later, the first crowdfunding platform was born.
Simply put, crowdfunding requires a group of people to put in money to support a project. Essentially, there are four types:
- Rewards-based crowdfunding: Investors contribute in return for non-financial benefits.
- Debt crowdfunding: Investors fund projects as lenders and are paid interest on their investments.
- Equity crowdfunding: Investors receive a return on investment by being offered private company securities.
- Donation crowdfunding: Designed for charities or those aiming to raise money for social or charitable projects.
While these are the most common types of crowdfunding mechanisms available, there are a few we haven’t listed here, one of them being a specialized form of equity crowdfunding: real estate crowdfunding, which we refer to as real estate crowd investing at Stake.
Adopted by communities of interested investors wanting to put their money into real estate projects and diversify their assets, one can ask: why is it so appealing? Ultimately, this mechanism relieves investors from having to deal with middlemen like mortgage brokers, real estate agents, and contractors. Lose the headache, yet still benefit from the perks!
Some reasons we can think of as to why individuals may be interested in exploring this type of opportunity are:
- The chance to diversify assets and investment portfolio
- The low startup capital requirement as compared to traditional real estate investments
- The shared cost structure enables financiers to invest in high-value properties as opposed to what they’d typically opt for
- The ownership risk is split among multiple stakeholders
- There is no need to personally provide upkeep and maintenance for the property
Read more on why investors choose real estate here
While this is all well and good, you might be asking yourself, where does my money go if I were to participate in a real estate crowdfund?
Well, there are a few technicalities behind the process, but for the most part, your money is put towards setting up a Special Purpose Vehicle (SPV) – a separate entity serving as a holding company that owns and operates various real estate investments. It is no different than setting up a new business, and should you choose to invest in a property, you are ultimately investing in the shares of this SPV that will own the title deed to the property.
Since a property’s deed cannot have a large number of investors listed on it, the SPV ensures that all investors are legally registered to the property and accordingly are issued shares in proportion to the amount they invested.
While exploring how the technical aspect works is significant, so is looking into the pros and cons. Real estate crowdfunding has some advantages as it is a tempting option for investors wanting to expand and diversify their assets while also maintaining a balanced portfolio of investments. But there are a few downsides to it such as less control over property management and having to incur fees charged by the crowdfunding platform.
With these cons in mind, as with any form of investment, be it in real estate or otherwise, it is important to take note of some tips for success. Seasoned investors encourage novice and aspiring financiers to do their research before committing to any opportunity concerning:
- The platform’s credibility
- The return expected on their investment
- The time before these returns are realized
- Review what type of real estate and property holdings to invest in
- Research the founders and team to determine business credibility
As real estate crowd investing has enabled access for people who are not just high-net-worth individuals to invest in what was once an expensive standalone asset, there is an exciting opportunity in today’s market to build wealth, develop financial knowledge and literacy, and achieve financial independence.
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