There Is A Simple Way To Enter The Property Investment Market Through Crowd-Funding
If you can’t afford to buy an investment property on your own, crowd-funded property deals are growing in popularity and allow you to get a slice of the property market for as little as few hundred dollars, writes DG Institute Founder and CEO Dominique Grubisa.
Younger Australians are often given a bad rap for spending their money on smashed avocado and overseas holidays rather than investing in real estate. But, the truth is they face a far higher barrier to entering the property market than their parents or grandparents did.
In the early 1980s, a typical Australian home could be bought for around twice the median household income. Today, at minimum, a full five years’ worth of income is required.
In major cities such as Sydney, the figure can be closer to 13 years.
Now there’s a modern way for both young people and anyone else with a modest budget to invest in property. Crowd-funded investment involves opening up property developments and investments to multiple investors, with each securing a small share of any rental income or sales profits generated.
Entry level investments often range from as little as $100 to $5000, allowing small-time investors to get a foot on the property ladder and then incrementally grow their real estate interests.
The concept of internet-based crowd-funding has been around since the early 2000s and was initially used to fund music and film. Today, thousands of crowdfunding platforms exist on which organisations raise money for projects ranging from technology and scientific advances to litigation, from social/environmental campaigns to start-up companies.
The practice is now rapidly growing in the property sector, partly because bank lending has tightened and would-be developers are looking at alternatives to raise capital. In practical terms, the concept involves an entrepreneur or developer pooling finance from smaller investors to pay mortgages secured on properties or to finance development. Crowd-funded projects can include residential and commercial developments and the ‘fixing and flipping’ of distressed property.
The maturing of crowdfunding means the property sector can utilise recent mechanisms from various crowdfunding platforms, such as parallel secondary markets. These allow small investors to increase their shareholding, or sell it to other crowdfunding investors, even after all shares have been allocated. Because the outlay is far smaller than traditional types of property investment, the dollar returns for investors are far smaller too. But, in general, crowdfunded real estate investors stand to receive returns via property sales or rental income in proportion to their shares. For example, the median unit price nationally, as at June 2018, was $554,504. A crowdfunded project of 10 units each at that price, funded by 500 investors, would on average cost $11,080 for a 0.2% share. Those investors would receive dividends of 0.2% rental yields or sales.
A big upside for investors is reduced complexity and risk: whereas conventional property investments require your name to be recorded against the title and associated mortgage, it is not the case if you are one of many crowdfunding a project. Therefore if a development fails you cannot be pursued by creditors and your credit history will not be impacted.
Also, as an investor in crowdfunded projects you get to manage your own stake in projects, via the secondary market mentioned above. Autonomy is higher and fees tend to be lower than with another property investment alternative – Real Estate Investment Trusts – where the investor buys a stake in the trust rather than specific developments.
It’s important to note crowdfunded property investment is not entirely without risk – unlike lower yield investments like bonds and term deposits. All real estate returns are driven by market prices for rentals, auctions and private sales. There is also evidence that some companies that use equity crowdfunding platforms may be doing so as a ‘last resort’ – because they lack internal resources and additional capacity to take on debt. So due diligence on the companies running crowdfunded property projects is a must – after all, many of them are start-ups and start-ups do not all succeed.
Another appealing factor is that crowdfunded real estate also makes it easy for everyday investors to get a slice of huge and high-end developments that they would previously have been locked out of, albeit only small holdings. These might include prestige commercial and residential properties, resorts and clubs.
There are many online crowdfunding platforms operating and deciding which ones to commit to is the beginning of your due diligence; the quality of the investment you make has a lot to do with the quality of your research as with all real estate investments.
Factors to consider in your research include the following:
- What type of developments do you want to back and why?
- Have you done research on the local market?
- How much do you want to invest?
- How do entry and ongoing fees compare?
- Does the structure allow you to increase or divest your stake at a later date? What is the process?
- Do you know the background and previous business dealings of the company offering the crowdfunding opportunity?
- How do they communicate with and update investors on each project?
- Can you speak to other investors already involved?
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.