Real Estate Crowdfunding is the hottest thing right now
It appears to be the ‘every person' way too easy wealth or at least it's being sold that way. The reality I think is somewhat different. I have spent that past year looking at buying various real estate crowdfunding businesses and the results have been less than impressive across so many of the start-ups.
As businesses, they have no track record, no deal flow, little investment research or due diligence, and even less of a business growth plan. Yet they are putting valuations up as high as £3 million for a business is 1 deal under its belt. In fact, my biggest concern is that there is a tendency amongst the smaller startups to think “put up a website and they shall come“. The reality is somewhat different.
Is your crowdfunding platform really in the game?
My personal belief is that Crowdfunding is ideal for those already in the property investment game, you can show deal flow and can show a level of due diligence on their deals.
I have seen so many bad business models in my travels that it feels very wild, wild west.
Enough about the platforms. What returns are you likely to see?
It's a lucrative business done right, as an investor you can access deals that you would not have normally had access to, it adds a certain liquidity to real estate that it normally may not have (unless your specific strategy is cash flow) as your money can go in and come out without you actually having to do the work to own and sell the asset. BUT, all the risks that apply with any property still apply and add on top of that the risks that apply to any business and you have the makings of a disaster.
That's key… Real Estate Crowdfunding has all the property risks and the business risks
So when assessing the deal treat if like two decisions, I suggest checking the property first. Does the property display all the good solid fundamentals, things like shops, schools, transport links, major employment, major investment. If it does then go to the next step, is the prices they are quoting realistic if they aren't then don't expect any platform or developer to be a market maker where they can dictate the market prices. Finally and if you are happy with the previous two then look at the business model the platform or company is using stress test everything if it all comes out on top then, by all means, go with it.
Enjoy the bliss because the horror stories will inevitably arrive
Real Estate Crowdfunding is better than the alternatives of business crowdfunding where the stories of losses are already starting to mount. At least in most case, you will have the property as security.
The investment property scams, bad business models and Ponzi's stories have only just begun to come out and will take a few years to trickle so be warned. The better you do your research upfront, the more likely you'll see the returns flow.
So why do I think Crowdfunding could go extinct because many of the business are start-ups and won't make it through the first stages of development, many will end when the stories of losses start to mount, and the investors (funders) become savvier. Those that do with adapting and become viable platforms. Many will change form due to regulations imposed on them, I am certainly seeing this in Singapore.
Actually, Real Estate Crowdfunding is just a new name for an old concept.
One of my businesses which uses our investors to crowdfund for our property development business has raised over £20 million now in capital. We return our investors, through debt-based agreement, around 10% per annum with security, it's a win-win, we get to build our business without the usual restrictions of capital that developers face and our investors get a good return paid either monthly or rolled up until the end.
The truth is that we use the word crowdfunding but really we have just jumped on the bandwagon before we call it Real Estate crowdfunding we called it debt-based finance, or we just didn't label, it was a loan from an investor to a business for the purpose of doing real estate deals.
Importantly, the same rules apply now that did before we called it crowdfunding, so apply the rule and perform well.
If you are interested I have written a book on the subject of Real Estate Crowdfunding. If you' re interested in finding out more then call the team on +44 (0)207 923 6100.
Live with passion and fun,