Crowfunding in Real Estate


Investing into real estate
Investing into real estate has traditionally required large amounts of funds to even get started. While returns on real estate can in the long run be more attractive than investing in for example stocks, exposure to the market is lower for the general public because the barriers to entry are so high. The real estate market is currently on the rise again, and this trend can be seen in many countries. As an example, according to the CBS the price of existing houses in Amsterdam rose by 14.7% during Q2 of 2016. Moreover, the rise of crowdfunding is stimulating some interesting developments in the real estate market, especially with respect to investing possibilities for smaller investors.

Howtoinvest_realestate

Can real estate be crowdfunded as a form of investment?
Launched in 2012, Fundrise is a real estate crowdfunding platform that allows the “average” person to have to opportunity to invest into real estate projects. These projects range from pooled small investments such as a single family homes, to large corporate buildings. The platform has set a minimum investment price of $1,000 and allows its investors to start accruing interest on their investment as soon as a project is funded. The benefits from investing directly into real estate assets is that there are generally less fluctuations in returns (granted that the project goes according plans) and more transparency. In fact, in 2015 the average annual return for all the investments on the website was 13.1% (Forbes, 2015).

crowdfunding_real_estate_projects

Efficiency Criteria
The platform is two-sided. On one side of the platform there are real estate investment trusts (REIT), which create portfolios by participating in the development of a variety of real estate assets such as hotels, shopping centers, houses and office buildings. On the other side of the platform, users (investors) can then invest into the real estate portfolios by essentially buying shares in these funds. Through this, the development projects are funded, built and eventually rented out or sold. Users can then earn gains or make losses depending on the success of the project pools in which they have invested. Users can however, not lose more than the initial investment that they put in.

As such, the platform creates a network effect in which the more users invest, the larger the pool of real estate assets can grow, and therefore the less risk to the users that they will lose their investment. The risks of real estate pools are defined clearly and are dependent on factors such as location, asset type, and structure. Users moreover have the chance to participate in redemption plans, in which they are able to sell back a certain amount of the bought shares to the respective REITs at the end of each quarter.

The business model behind the platform is relatively well protected against legal regulations. This is because it essentially deals in shares of the REITs to fund projects, rather than by providing a loan type structure. Moreover, users get a transparent view of the assets, structures, and locations that they are investing into. The one major downside of the platform is that your investment funds are essentially managed by an external management team, and are therefore dependent on their knowledge and execution. In this aspect, the user does not have the ability to exert direct control over the way in which their money is invested, which might not always be favorable.

Sources:
https://www.cbs.nl/
https://fundrise.com/
https://www.forbes.com/sites/trangho/2015/12/03/how-to-play-billion-dollar-real-estate-deals-with-just-1000/#246e38a02173

 

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