Crowdfunding in the Real Estate Market: Fad or Trend?

Written by Kevin Lev Posted On Wednesday, 15 January 2020 10:41

In recent years, real estate prices in many of the world’s major markets have seen growth that has outpaced any fundamentals of their respective underlying markets. The ratio of home prices to incomes have gone through the stratosphere in the hottest markets.

Many analysts pin this on the influx of literally trillions of dollars of hot money from Mainland China as a result of the crackdown on illicit funds by the current administration there. This is a phenomenon set to continue for the foreseeable future not just in the most popular markets such as Australia, London, Singapore and the North American west coast, but spread further into increasingly frontier markets where price ratios are still relatively subdued.

This becomes a challenge for smaller investors looking to get their foot in the door of the real estate market. Most investors lack the discretionary funds necessary to purchase an investment property by themselves. This is made even more pressing by the fact that this price trend does not show much signs of slowing down anytime soon. Given these two pincers, it is no wonder that investors are coming up with new techniques to invest, principal of which being real estate crowdfunding.

How Does Real Estate Crowdfunding Work?

Real estate crowdfunding can be a very multifaceted and complicated subject. It is best for would-be investors to learn about the ins and outs of real estate crowdfunding.  In general, real estate crowdfunding operates under similar mechanisms like any other crowdfunding effort with some small caveats. By visiting Doughroller’s breakdown of the ins and outs of real-estate crowdfunding you’ll be well versed in this fairly new phenomenon, as well as provided with vetted outlets in this investment niche. 

First, a platform needs to be set up in order to act as a center for the pooling of investor funds. This can be a physical location but increasingly, online platforms are taking prominence due to the convenience as well as the opportunity of including a wider pool of potential investors. 

Once a sufficient level of capital has been raised from investors as well as potentially some leveraging, the fund will be deployed into the appropriate real estate investments. The range of acceptable real estate investments would be determined prior to any capital deployment by overwhelming consensus amongst the constituent investors. 

Over time, as dividends and capital gains come in, there would be two main options regarding how to dispose of them. The first would be to distribute them in their entirety to the constituent investors based on their contribution to the fund. The other option would be to reinvest the dividends and capital gains back into the fund in order to enjoy the compound effect. Again, the decision of what is to be done would ideally have been determined prior to investing.

The Benefits of Real Estate Crowdfunding

Real estate crowdfunding is seen by many as a refreshing addition to the realm of real estate investing. One of the main reasons for this is because crowdfunding allows for many investors who otherwise could not participate the ability to be included in more asset classes. 

What crowdfunding does for investors in essence is it greatly lowers the barrier to entry for any asset class. Some asset classes, such as real estate, have relatively high barriers to entry for individual investors by virtue of the nature of the asset class. Mining consortiums are another great example of this.

By pooling investor funds into a single spot using crowdfunding, the pool of funds will in practice be like a large single investor who can enter a greater variety of asset classes simply because of their larger pool of capital. This allows for investors who do not have the financial ability themselves to diversify their portfolios to do so through crowdfunding.

This benefit will only become more apparent over the coming years due to the price inflation trends seen in many key asset classes. Many emerging markets, China in particular, are seeing the emergence of two phenomena that reinforce each other with regards to global asset price inflation. 

On one hand, the increasing affluence in these countries brought on by decades of steady economic growth and development has given birth to a large middle class as well as an increasingly prominent superclass of business tycoons. At the same time, consistent political instability in many of these countries breeds an air of uncertainty that more and more people now have the ability to escape from.

This has been the primary driver of new money from the Western Pacific looking for safe places to park themselves in. Real estate, along with freehold farmland and pastureland, have been the main targets of this capital influx. Until this situation alleviates, asset price inflation will continue to be the rule of the day, making crowdfunding an ever more needed tool for ordinary investors to properly sort out their portfolios.

More Trend Than Fad

As you can see, the phenomenon of crowdfunding is much more a trend than just a flash in the pan. As long as real estate remains out of reach of a large segment of investors, the use of crowdfunding as a vehicle of inclusion will continue to play an important role on the investment landscape.

Crowdfunding has been one of technology’s many gifts to humanity that has enabled people to do and participate in things that they would not have been able otherwise. It will be very exciting to see what other treasures the information technology will bestow upon us in the coming years.

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