Real Estate Crowdfunding: What Is It & How It Works?
The real estate sector is a prominent and rapidly growing sector across the world, and investing in real estate seems a viable option for someone ready to invest and reap benefits. Unlike the yester decade where real estate restrained access to investments from small-scale individual investors, the novel approach of crowdfunding is trending, where the individuals can take part in real estate investing via numerous blooming online platforms.
Crowdfunding emerged in India in 2012 through various platforms that serve various purposes like social causes, real estate investments, and many more. Before streamlining crowdfunding to the real estate sector and its benefits, let us understand what crowdfunding is.Â
Read Also: What Is Commercial Real Estate Crowdfunding In India?
What exactly is crowdfunding?
Crowdfunding, as the name suggests, is the process of investing by a number of people. It refers to collecting small sums of money from many people for a specific project, business venture, or social cause.Â
As the saying goes, little drops of water make a mighty ocean; in short, crowdfunding is a little sum pooled up for a long way.
Types of crowdfunding
There are five types of crowdfunding on a broader classification which are as follows.
Donation/Social crowdfunding
It is a legal form of crowdfunding where people donate money without any expectations, maybe for social, artistic causes, and personal interests.Â
Pre-order crowdfunding
Here, the investors contribute today, intending to receive a product later. It is like pre-purchasing a product and is legal in India. For example, real estate crowdfunding can be considered pre-order crowdfunding as you would receive a share in the property you have invested.
Reward crowdfunding
The contributors form a community crowdfunding to receive a non-financial award in the future, such as exclusive access to the project, limited merchandise, and many more. Wishberry is an online platform that supports creative ideas and raises funds for these projects.
Debt crowdfunding
It is a form of peer-to-peer lending, also abbreviated as P2P lending, where the money is lent to individuals or businesses through online platforms. The Reserve Bank of India regulates peer to Peer lending. In this, developers get access to the resources without having to approach financial institutions like banks. It helps the developers save some time by avoiding tedious procedures. The investors also benefit from the high-interest pay-outs from the borrowers.
Equity-based crowdfundingÂ
It refers to the fund raised in an early stage through offering interests in the business to investors online.
Also Read: Evaluating Your Crowdfunding Real Estate Investment – A brief guide
Crowdfunding Platforms in India
There are many crowdfunding platforms in India:
- Assetmonk – A wealth-tech platform related to real estate investments, Assetmonk is making commercial real estate investments accessible and affordable for smaller investors using crowdfunding methods. The company has successfully helped more than 150 investors make smart investments from across the globe. Â
- Rang De and Faircent – internet peer-to-peer microlending platforms;
- Ketto – supports fundraisers in social projects, creative arts, and personal development;
Why Crowdfunding in Real Estate?
Crowdfunding in real estate helps the investors to bag a share in the property they are investing in. It is similar to equity investment as the investor can buy and become a shareholder in real estate properties. Crowdfunding takes place through online platforms and provides access to both developers and investors.Â
Here are some of the factors that drive investors to invest in real estate through crowdfunding.
Increased AccessibilityÂ
Traditional real estate appears like a closed box from a beginner’s frame of reference. It seems almost inaccessible to non-professionals. All thanks to crowdfunding! The internet platforms make it a cakewalk for non-professionals to invest in real estate, with the platforms as a beacon of hope to novices in real estate investments.
Investing in real estate assets demands good capital. Through crowdfunding, you can bag a share in the property and earn returns. Crowdfunding, therefore, made real estate accessible to investors with small sums of money.
Hassle-free Property Management
Investing a vast amount of money needs all the attention and involves high risk. Being an owner of a property comes with a sack of responsibilities of maintaining and organizing it.
Crowdfunding provides you with the part-owner, and you do not have to manage the property as a common property manager would be hired for this purpose. This reduces the burden of handling the property, enjoying the profits at the same time.
Eliminates Requirement of Loan
Traditional real estate investments require a huge sum of money which turns the possibility to acquire a loan. Here comes the savior; crowdfunding requires small sums of money pooled from many investors and hence does not need a loan, which eliminates the interest payments and saves some money in turn.
Reduces risk through Diversification
Suppose you are ready to invest in a single property and obtain full ownership. In that case, you must also be prepared for the risks owing to the volatile demand and the fluctuating market prices. Crowdfunding proves to be a game-changer in this scenario as it provides the investors with the option of small investments that lets you diversify the resources into different properties.
Some platforms let people invest in different currencies that diversify the portfolio to mitigate currency risks. These online platforms have moved real estate from local business to global business.
Speeds up the investment process
High-end investments involve a lot of procedures and paperwork before finalizing and materializing the project. Crowdfunding happens on online platforms that wipe out these tedious procedures enhancing the speed.
Setbacks of Crowdfunding
As every coin has two sides, so does crowdfunding. The following factors have to be considered before investing, as your investments may take a toll due to miscalculations and misconceptions.
Assessing the credibility of the Developers
Not all the projects that are initiated are materialized. This leads to credibility issues as the investments are pooled in crowdfunding at the project’s pre-launch stage. Nevertheless, the pooled sums are returned to the investors by credible developers under insufficient pooled amounts. It is wise if you check the track record of the developers before deciding in haste.
Controlling the Property
If you invest through crowdfunding, the property is handled by someone altogether. You cannot exercise control over the property even if you observe the falling trends of the property.
Also Read: Tax Implications on Real Estate Crowdfunding in India Made Simple: What You Need to Know
How does crowdfunding work in Indian Real Estate?
Apart from the crowdfunding platform, there are three major organizations that play a vital role in every real estate crowdfunding project. These are the following:
- Sponsor
- Trustee
- Manager
The sponsor is a company that identifies a profitable opportunity, prepares the acquisition, recruits investors through crowdfunding platforms, and manages and sells a real estate asset. Once the investors have signed on, a Special Purpose Vehicle (SPV) is formed to acquire the asset, in which the investors are shareholders.
The project is then overseen by a trustee, who is responsible for ensuring that the project meets all legal criteria. It also provides services in corporate governance, holding security on behalf of lenders, and advising and managerial duties.
The Manager is in charge of the asset as well as the investments made in the specific property. One of the key responsibilities of a manager is to carry out the operational activities of the concerned real estate asset in compliance with the requirements of a regulatory authority.
Is Crowdfunding Legal In India?
Donation Crowdfunding, Peer-to-Peer Lending, and Reward Crowdfunding are the three types of crowdfunding approaches now permitted in India. As a result, a corporation that wishes to raise money jointly must adhere to the criteria set out in the –
- Securities Exchange Board of India Act, 1992 Companies Act, 2013
- Depositories Act of 1996, Securities Contracts (Regulation) Act of 1956, Securities Contracts (Regulation) Act of 1956, Securities Contracts (Regulation) Act of 1956, Securities
Equity crowdfunding has been characterized as an unlicensed, unregulated, and unlawful activity by the Securities and Exchange Board of India (SEBI), India’s securities market watchdog. Firstly, because the investor may lack the necessary skills and/or expertise to assess the asset’s risks. Small investors may be drawn to such investments in the hopes of better returns, but such investments can be dangerous.
Furthermore, because there are now no well-defined standards for real estate crowdfunding in India, such investments may impair the liquidity of a low-risk appetite investor. Although experts believe that crowdfunding would revolutionize the way people exchange money, the notion has yet to catch on, notably in real estate.
Crowdfunding in Real Estate FAQs:
Crowdfunding is the process of pooling up money from various people for a common cause like social, artistic, and real estate purposes. It happens through online platforms and helps the developers pool some funds, and also investors gain access to the products or services.
There are various crowdfunding types like social, reward, pre-order, debt-based crowdfunding, and equity crowdfunding. Accordingly, these types function like social crowdfunding is the act of pooling money for social causes and artistic causes, and the funders expect nothing in return. While the pre-order and other types of crowdfunding expect the services or products or a share in the assets in return.
The investors through crowdfunding bag a share in the property and become a shareholder. As the property value escalates, the investors gain through the property’s escalated value when sold and the rental returns. Also, the investors can bag a share in the high-grade properties through small investments.
The builder or developer’s credibility has to be assessed, and the track record has to be checked before jumping into investments. Else, you may end up making an expensive mistake. In crowdfunding, you certainly gain fractional or part ownership, but you cannot control the property even if you observe falling trends.
The crowdfunded gain access to the properties or assets they invest in and earn lucrative returns. You also do not have to manage the property; hence the crowdfunding lets you have hassle-free returns flow into your account.
