Crowdfunding for real estate offers a new way for investors to get into the property market. The basis behind crowdfunding is for developers and real estate investment fund managers to raise capital from multiple investors for investment purposes.
Investors have the advantage of owning a share of a large property investment that might otherwise have been out of reach. Another significant benefit is the ability to get started in the property investment with a relatively small investment.
For example, some online crowdfunding portals will allow investors to get started with as little as £50. Others may require a larger initial investment to get started, with many ranging between £5,000 and £50,000.
According to Nesta crowdfunding was responsible for raising more than £1.5 billion for various business ventures in 2011. The figure is still increasing as crowdfunding becomes more popular with investors.
While the idea of crowd-sourced real estate investments sounds like a great way to get into the property market, there are always some things to watch for before you jump into the deep end. Here are some things you need to consider before you get started:
How does the fund operate?
Before you jump into any investment offering, take the time to check whether the platform you’re considering is a member of the UK Crowdfunding Association. The company you choose to invest your hard-earned money with should be operating under FCA regulations and offer full legal protection of shares for each investor.
You should also check that each real estate investment under management is rigorously vetted to ensure good returns for investors.
What are you investing In?
Many real estate crowdfunding projects focus on high-demand properties in sought-after locations. Others may be based on commercial projects, or multi-apartment complexes. Take the time to check what types of properties are under management by the fund you want to invest into.
If you’re unsure about the location of the property, or the prospects for rental demand in the area the project is situated in, ask the professionals at gpees.co.uk for a second opinion. They specialise in letting services and understand the local rental markets. They’ll also be honest about property appraisal values, which can give you more insight into whether the project’s overall capital value is being fairly estimated.
Is it a good investment?
As with any investment strategy, it’s crucial to complete your due diligence before parting with any of your hard-earned money. While the initial property on offer might look attractive, it pays to check what returns are being offered to investors and how those returns are being generated.
For example, the fund may be raising capital to complete construction on a multi-apartment complex in a fantastic location. However, while the property is still under construction it can’t generate any rental income. In this case, the returns may be based on the estimated capital growth of the property after the project is completed, plus projected rental income.
However, if the developer can’t find a way to complete the project, or goes out of business before completion, there’s a risk that investors could lose their money. Good developers should have previous experience with larger projects and have a proven track record of earning healthy returns for investors.
Take time to do some homework into the fund. You’ll find it easier to make an informed decision about your investment strategy.
What returns are being offered?
Most real estate crowdfunding projects are open about exactly what returns investors can expect for their investment. Your return may be a share of equity in a completed project. The returns may be offered as passive income derived from your share of any rental income generated by the property.
Be sure you understand what returns are anticipated before you commit any cash.
What is the fund’s exit strategy?
Always begin with the end in mind. Before you invest any money into a real estate crowdfunding investment, take some time to check out what exit strategies exist for the fund. In some cases, you may be able to sell your shares to other investors at a set price determined by the fund manager.
In other cases, you may be able to cash out your investment – along with your profits – at a pre-determined point in time. For example, the fund may have a condition allowing investors to pull out of the investment after a 5 year period and recoup their initial capital investment, along with any profits derived from the fund at that time.
How do you get started?
Most crowdfunding projects use convenient online platforms. Once you’ve located the real estate investment opportunity you want to invest into, you simply create your online account and invest your money.
Before you know it, your investment could give you access to a share of ownership in some truly exclusive real estate that generates ongoing passive income for years to come.