Real Estate Crowdfunding is a Great Option for Developer

Crowdfunding has become one of the most popular forms of real estate investing. It allows a broader range of people to participate in an investment opportunity, and it’s a great way to take advantage of the many benefits of real estate investing while earning passive income.

There are several types of real estate development projects that can be funded through crowdfunding, but the most common types are commercial real estate. While this type of project may have been reserved for institutional investors in the past, even small investors can now participate through real estate crowdfunding.

Developers use real estate crowdfunding to raise capital for their projects from private investors. The capital can be raised through debt, equity, or even a combination of both. When it comes to real estate development, a developer will often fund their project through a combination of bank financing and capital raised through crowdfunding to cover the down payment. The developer keeps full control over the project, and the crowdfunding investors simply earn a passive return on their investment.

Some real estate development crowdfunding campaigns are intended to be a short-term investment. In this case, the developer either sells or refinances the project when it’s complete and pays the investors back their principal investment, plus their return.

In other situations, the developer may offer investors a long-term stake in the real estate project. In this case, the investors will earn a return through the returns the property generates once the development is completed. This will usually involve monthly or quarterly distributions and equity growth.

In either case, most real estate crowdfunding deals have a target investment period. The developer will have an exit strategy that allows the investors to receive their invested capital back. This may be as short as six to 12 months for smaller short-term projects, or five to 10 years for longer-term investments. The exit strategy usually involves either selling the property or refinancing to pay the investors back.

Crowdfunding comes in two basic forms: debt and equity. In either form, the developer still raises capital from private investors for their project. The main difference is in how the investors will earn a return. Both have their pros and cons for both the developer and investors, so choosing which type of crowdfunding to go with will depend on what makes the most sense for a specific deal.

With debt crowdfunding, the property developer promises to pay investors back their invested capital plus a specified interest rate. With this type of crowdfunding, the investors don’t receive any equity in the deal. Debt crowdfunding is similar to P2P lending.

Real estate developers may choose to go with debt crowdfunding to avoid diluting the equity in the project, especially when there are already other investors or partners involved. Some investors prefer debt investing over equity because they want to know what their return on the investment will be.

On the other hand, many investors choose to take on the added risk of an alternative investment like real estate crowdfunding because they want the potential upside that comes with an equity investment. Raising funds through debt investment can be more difficult for developers that don’t already have a substantial amount of assets and a solid track record.

With equity crowdfunding, the investors are buying a piece of equity in the project. Instead of agreeing to pay the investors back a set amount, the developer is allowing the investors to share in the profits on the deal, whether that’s through rental income, appreciation, equity build, or all three.

Equity crowdfunding is typically the riskier option for investors, but it also has the most upside potential. If the developer fails to complete the project, the investors could be out of everything. On the other hand, if everything goes as planned with the real estate investment, the investors can make a substantial profit.

Since equity crowdfunding doesn’t involve a guaranteed payment from the developer to the individual investor, it can be less risky for the developer if there are delays in the project or it doesn’t produce as much cash flow as anticipated. However, it can also mean they’re sharing a lot more of the profits with the investors than they would be with debt.

The beauty of crowdfunding for real estate developers is that they can raise capital from investors without taking on the massive expense of becoming a publicly traded company. While crowdfunding comes with a lot less red tape and legal bills than an initial public offering (IPO), there are still rules set by the Securities Commission Malaysia (SC) that have to be followed. 

The real estate crowdfunding market can be a great option for a real estate investor who wants to get involved with commercial real estate or another real estate asset class that may otherwise be out of reach. However, it’s important for a potential investor to understand that this type of investment doesn’t have the same level of oversight from the SC as a publicly-traded real estate investment trust (REIT) or other similar investment. This is why the SC has placed strict limits on how much non-accredited investors are able to invest.

A crowdfunded investment can provide a real estate investor with a quick and easy way to lock down an opportunity that might otherwise be lost due to financial shortcomings.

Crowdfunded real estate investments can also be an attractive alternative to real estate deals funded with a traditional loan or mortgage. By structuring participation in the real estate project as equity crowdfunding, the principal partner (the one in charge of the arrangement) can offer each individual investor an equity investment in the property (ownership) instead of paying them interest. In this way, a crowdfunded investment offers greater flexibility.

When it comes to using a real estate crowdfunding site for the average, non-accredited investor, this can be a great way to generate cash flow without the volatility risk of the stock market. Real estate tends to be a more stable investment over time, so participating in a crowdfunding investment or one of the many publicly-traded REITs can be a great way to stabilize an investment portfolio and reap dividends from the crowdfunding space. Even an accredited investor can benefit from crowdfunded real estate, which can create sizable cash flow and dividends without the burden of needing to manage a portfolio.

In terms of participating in a crowdfunding platform by contributing cash, drawbacks include fees, taxes, and the illiquidity of real estate as an asset. Some platforms charge 2.5 percent or more for the management of your funds. 

Real estate is also considered an illiquid asset, which means that if you want to pull your money out of the investment for some reason, that is not as simple as making a withdrawal from a brokerage account invested in stocks.

In terms of doing your own real estate crowdfunding, the immediately apparent con is the work involved. It’s much easier to get a loan from one person than to round up multiple investors. You may also find that the increased number of participants eats away at your profit. You must also remember to legally structure your deals so that investors cannot exert an undue influence in the process of decision making. The easiest way to do this is by making them limited partners, but even that still requires a lot of legal paperwork.

Real estate crowdfunding might yield capital faster than a mortgage from a traditional institutional lender, but it can also take longer than securing a bridge loan or swing loan from one investor.

This approach has become a feasible alternative to traditional ways of raising funds for investments. It pools small amounts of finances from various investors (lenders) to finance a real estate asset or a portfolio of properties. As an investor, you get to invest your funds either through equity (you own a stake of the real estate asset) or debt (you lend money as a loan) in return for a proportional stake of the project returns (sales value increase or rental income).

The major attractive point of crowdfunding in real estate investing is that it gives small investors the opportunity to participate in high-income and highly sophisticated real estate projects. For large real estate developers, they use crowdfunding platforms as a mean of soliciting investments from accredited investors groups. On the other hand, small real estate business owners launch crowdfunding campaigns to raise money for smaller investment deals.