In the real estate world, crowdfunding allows investors to buy a share of a property or development project. Entering the property market is expensive, but it gets easier if you divide the purchase costs (and eventual profits) among a larger group of crowdfund investors.
The way investors make money depends on the type of investment. For some investments, such as a residential house or unit, investors could share the rent the property generates. For other investments, such as a large-scale property development, profit comes with the eventual sale price of the property.
Crowdfunding a property investment has a few potential benefits over traditional investing (buying a property yourself and renting it out while hoping the value grows).
The main draw of crowdfunding for real estate investment is that it lowers the barrier into the market for would-be property investors. Buying a property yourself means saving a deposit of up to 20% of a property's price. It means borrowing hundreds of thousands of dollars through an investor mortgage and paying tens of thousands of dollars in stamp duty.
Crowdfunding allows these costs to be spread among a broad base of investors. It likewise allows these investors to share in the returns. While it may seem like an uphill battle to come up with, for example, $580,000 to purchase an investment property, crowdfunding means that 580 individuals could invest $1,000 each and then share in the rental returns or the profit generated by the sale of the property.
Real estate crowdfunding also allows everyday investors to access projects at a scale that would be otherwise impossible. Crowdfunding platforms in Australia have offered stakes in large-scale commercial properties and huge residential developments along with traditional, single family, owner-occupied properties.
These large projects are usually off-limits to the individual investor.
An investor in a crowdfunded property does not have their name on the property’s title or on an associated mortgage, meaning their credit history isn’t impacted should the investment take a turn for the worse. Moreover, with the ability to trade or sell stakes in an investment at any time, investors aren’t tied to properties long-term.
If you’re looking to get involved in property investment but don’t have the means to save a deposit for a home loan (or simply don’t want the long-term commitment), crowdfunding could be a good alternative. However, it’s important to keep in mind that with a smaller investment you won’t see the same level of returns you could with traditional property investment.
Getting involved in crowdfunded real estate projects can offer a good, hands-on learning experience in picking the right properties to maximise your investment. Second, real estate crowdfunding can often carry a higher rate of return than shares or term deposits.
For would-be investors looking to save a deposit, putting your money in a crowdfunded real estate project could see it grow much faster than it would sitting in your savings account. The caveats to this, of course, is that returns aren’t guaranteed.
Real estate crowdfunding in Australia is still in its infancy, but there are several platforms you can use to participate. These include the following:
These platforms let individual investors buy shares in property projects. Different platforms carry different minimum investments, from $100 up to $5,000.
To get started, pick a platform with a level of investment, structure and choice of projects that suits you. Research the projects available to backers and decide which one looks most attractive to you. While most crowdfunding projects will give investors an idea of the rate of return they can expect on their investment, it always pays to do independent research on the properties or areas available for investment.
If crowdfunding an investment doesn't work for you and traditional property investing is too expensive, you do have other options:
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