This article is written by Umar Munshi, Co-founder of Ethis Global, an emerging group of ethical crowdfunding and fintech companies licensed in various jurisdictions. Starting in Singapore in 2014, Ethis.co is now present in Malaysia, Indonesia and Dubai where it serves small and large investors to match them to projects with healthy profits.
When we look back at how our grandparents used to go about property investments, it sure doesn’t resemble or hold a candle to how we can do it today. We have somehow landed ourselves in capricious times and earned ourselves endless opportunities in the process. In comes crowdfunding; a platform that allows individuals with similar aspirations to join funds towards achieving a shared financial prospect.
In the field of property investment, crowdfunding simply shifts paradigms; this is mainly because it allows large amounts of money to be raised in short periods of time. Investing in real estate is widely known for its financially taxing nature and requirement for thorough planning. Add crowdfunding to the equation and you make property investment available for everyone. For you as an investor, this means no more shying away from real estate because you’re have mountains of cash (or credit), no more saving up for years and years to reach the property’s worth, no more going through the research hassle and carrying all the weight alone and definitely much less stress.
So let us answer this; how does real estate crowdfunding work for the investor?
The process of real estate crowdfunding is quite simple really; with a few easy steps you can get yourself started and investing like a pro in no time:
Firstly, although crowdfunding allows flexibility in the amount that can be contributed, financial planning is always a vital part that cannot be overlooked when it comes to any investment. Investors planning to go into crowdfunding still need to look at their income, expenditures and savings to determine their investment capability. After all, without proper planning it is easy for investors to get carried away and cause themselves financial discomfort in the long run.
Finding a Platform
Crowdfunding is a process done on online platforms. The platforms provide a wide variety in the services they offer to cater to the different types of their crowdfunding communities. Generally, for real estate, crowdfunding platforms offer two types of services: debt based crowdfunding and equity based crowdfunding. In the former, investors are fund lenders. They contribute to the construction of housing projects.
These projects are carried out by developers who manage the construction and sales of houses; from land purchase, grading and site preparation, the building of units and up to the marketing and eventual sale of their properties to end buyers. Investors receive their returns from the sale of units in the form of profit or interest. In equity crowdfunding, investors participate as joint-venture partners or shareholders.
They hold shares of the properties with ratios appropriate to the amount of funds that they contributed. Once the projects are completed, investors are typically paid a portion of profits made from the sale of property.
The Crowdfunding Process
Investors choose the type of investment in line with their principles from their preferred real estate crowdfunding platform. Platforms showcase a variation of property construction projects with a predefined target fund required for the project to commence, eg the construction of 10 units of houses.
Each project is backed with information about developers, the expected duration for its completion, projected returns on investments as well as the location and sale prospects of the units. The level of detail of campaign information varies from one platform to another, as does the screening and selection process of projects.
After looking at the prospects of each project, investors then can transfer the amount of funds they feel comfortable with to the one they select. The amounts that each investor contributes builds towards fulfilling the target amount set for that campaign. Once investors have made their transfers, all they have to do is wait for the amount to be met by the contributions of other investors.
This can be reached in a matter of days, a couple of weeks or in some rare cases months depending on the size of the project, how attractive it is, the size and capacity of the platforms’ communities and the maximum duration of the fundraising campaign. More often than not, due to the connectedness and reach of online platforms, the process of funding worthy projects can be very quick.
The Construction Period
Once the target amount is reached, the construction of the housing project begins and investors can now monitor its progress through updates provided by campaign owners either through email or on the crowdfunding platform. Some platforms offer investors personalised dashboards to keep track of the progress of all their investments. The construction period varies from one project to another depending on the type of property being built, the cash flow planning of the developer and its location. Investors are often notified of any delays that could occur due to circumstances including poor weather or delays in the processing of permits and licenses.
Property development and construction is a business activity which can face challenges like any other business in the real world. The key advantage of the property development business is that there are real assets such as land and buildings that provide security for the project and its investors.
Developers make their money when their units are sold. This is done directly by an in-house sales team or through property agencies. Ideally, developers try to secure end-buyers before raising funds for construction of the property, to lower the risk for investors and correspondingly allow for quicker fundraising. A major factor to consider is the availability of home financing or mortgages for buyers, as it is usually unlikely for buyers to have enough savings to afford a full cash purchase.
Once the sale of units is made to end buyers and payment for the units is received, the developers are able to start processing the payout for crowd-investors. Profits can vary according to the type of investment, the pre-agreed ratios for returns and the performance of the project.
Yet, it is very rare that there will be no profit at all as property development builds structures on land, which has inherent value that is increased from the construction from these structures. According to the Global Monetary Fund of the IMF, the housing market has displayed a steady climb over the past 18 years.
If there is anything that we can deduce from this, it is that it is highly likely that investing is property will continue to be a good idea for years to come.