What is crowdfunding in real estate?


Crowdfunding is a financial model wherein the developer is able to raise capital by bringing in a pool of interested investors

These days, crowdfunding for a cause is extremely popular. You would have heard about people donating money for a cause, towards the medical care of a person who is unable to pay for themselves, or for the construction of a charity hospital. There are so many reasons why people may like to volunteer, to donate or support a cause monetarily. Most of us get to know of these causes through social media. Such platforms connect people from around the world and make crowdfunding possible. While you may have heard about similar social causes, crowdfunding in real estate also exists.

 

Crowdfunding and real estate

 

Crowdfunding in real estate

 

Crowdfunding in the real estate space is no different. It helps real estate investors to bring in large amounts of capital, easily and quickly. In turn, they become shareholders in the company or the property. Through crowdfunding, they are able to become shareholders in a project and are able to raise the capital that they would not have been able to, otherwise. Having said that, crowdfunding in Indian real estate is not as mature and popular when compared to crowdfunding for social causes.

To understand better, let us see an example.

A real estate developer sees a dilapidated property that has no amenities. This property, perhaps for its locational value, is priced at Rs 2.5 crores. The developer notes down his requirements and makes certain estimates, with respect to renovation, developing the amenities, etc. Suppose, he/she estimates that with the required renovation and development at a cost of Rs 1.5 crores, the market value of this property will be Rs 8 crores over four to five years. So, this person requires Rs 4 crores now. Here is where crowdfunding comes up as an opportunity for individual investors. The developer prefers these investors, rather than taking a bank loan.

 

Types of crowdfunding in real estate

Equity crowdfunding

One of the ways to crowdfund is to go with the equity-based model. In this, you invest a small amount to help the developer raise the capital and in return, you receive a share (when the property is sold) or a percentage of the rental amount. This model generally gives more returns to investors.

Debt crowdfunding

The more traditional and popular out of the two types of crowdfunding, debt-based crowdfunding involves the investor receiving a fixed interest rate, which is proportional to the amount invested.

 

Characteristics of crowdfunding

It is illiquid: You cannot sell the property at your own will, simply because it is not entirely yours and there are many investors and stakeholders.

High-value projects: You may or may not afford to invest in a high-token project but with a crowdfunding setup, you just need to put in whatever you can afford and be part of a much bigger project.

Transparency: Unlike Real Estate Investment Trusts (REITs) that involve a whole lot of managing of assets and books, a crowdfunding set-up is comparatively easier and transparent.

Risk: When you invest in a brand or a well-known developer’s project, you know what you are getting into. A lot of details about the developer’s financial health, their track record of development and delivery projects, are available in the public domain. Most developers who seek crowdfunding may be lesser-known. Sometimes, their plans may not take off and there is some risk involved.

Returns: Unlike crowdfunding for social causes where there are no tangible returns, crowdfunding for real estate projects help investors to get proportionate returns and there is a possibility of high returns.

 

REITs versus crowdfunding

REITs Crowdfunding
Not free to choose which property to invest in Freedom to choose the property
Guaranteed income for investors in the form of dividends Low to high returns
Involves maintenance costs Investor need not manage or maintain the asset
Lesser transparency Easier to track and understand
Low-risk investment Can be risky
Heavy expenses, as minimum investment is high (Rs 2 lakhs) in India Lower expenses, no minimum investment amount
Not meant for small investors Does not require any credit checks

See also: Crowdfunding versus REIT: Crucial differences

 

FAQs

Do REIT shares have higher liquidity than crowdfunding shares?

Yes, given that REITs get traded daily on stock exchanges, these can be bought or sold quicker.

What is the biggest difference between REITs and crowdfunding?

REITs are better managed by a regulator. On the other hand, crowdfunding is within the reach of many big and small investors and runs the risk of poor management, at times.

What is the minimum amount required to invest in crowdfunding of a real estate project in India?

India is not very advanced when it comes to the crowdfunding financial model. However, the advantage of crowdfunding is that there is no minimum amount, unlike in the case of REITs.

 

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