Despite the fact that real estate crowdfunding is a relatively new concept, it has quickly gained traction in the mainstream investment space. As a result of the increased demand, real estate crowdfunding investments have been divided into subdomains.
The concept of the “ideal crowdfunding strategy” is an investment illusion. So, in the long term, the strategy that matches with one’s risk tolerance and return expectations works best.
Types Of Real Estate Crowdfunding Investment
Generally speaking, there are three types of real estate crowdfunding investments that we will cover in this article:
- Equity Crowdfunding
- Preferred Equity Crowdfunding
- Debt Crowdfunding
The three types of real estate Crowdfunding investments will be discussed below
1. What is Equity Crowdfunding?
Equity crowdfunding is widely regarded as the most secured form of real estate crowdfunding. They’re particularly common in commercial real estate developments. Crowd-investing equity crowdfunding or Investment crowdfunding is another name for equity crowdfunding.
In equity crowdfunding, individual investors in a crowd-funded project are entitled to stakes and profits in proportion to the amount they contributed in the project. It’s comparable to how the stock market works. When real estate investors invest in a deal, they automatically become shareholders in the property.
Consider the case of a seasoned real estate investor who obtains a lucrative contract but lacks the necessary funds to invest in the property. As a result, the sponsor has the option of submitting the deal to equity crowdfunding platforms. Hence, they will be able to publicize their projects. They may also be able to raise money from other private investors to help fund the purchase.
Assume that the crowdfunded equity investment project requires $5 million in total funding and that one investor contributes $50000. (1 percent of the total). Following that, the equity investor will receive 1 percent of the overall profits generated by the agreement.
Therefore, equity crowdfunding investments provide real estate crowdfunding returns in the form of consistent rental income to investors. Furthermore, when the subject asset is sold, these investors enjoy appreciation gains.
Additionally, depreciation expenditure deductions are available to equity holders. As a result, investors are paid out in proportion to their stake in the project and the agreement structure.
Through real estate investment platforms, potential investors can use equity crowdfunding to invest in startups and small enterprises. This crowdfunding plan, which is a non-traditional way of raising capital, is frequently limited to accredited angel investors. This is due to the fact that most platforms strive to reduce the danger of losing money. Non-accredited investors can, however, participate in advanced projects on most platforms.
Benefits of Equity Crowdfunding
The following are some of the benefits of investing in real estate equity crowdfunding:
- High returns:
Through appreciation or disposition, equity investors can easily double their initial investment through crowdfunding returns and distributions. The investors receive annual returns ranging from 18 percent to 25 percent, with no cap on returns.
- More tax deductions:
Equity investors can benefit from depreciation deductions. As a result, they can reduce their tax liability every year.
- Lower fees:
Investors in real estate equity crowdfunding projects pay a single annual fee that ranges from 1% to 2% of the entire amount invested.
2. What is Preferred Equity Crowdfunding?
In Preferred Equity Crowdfunding, the term ‘preferred’ refers to the additional benefits and privileges that investors receive in exchange for their investment. As a result, rather than investing in general equity crowdfunding, most Angel investors and venture capitalists prefer to invest in preferred equity crowdfunding.
Dividends from the company’s profits are paid out to preferred equity investors in this type of real estate crowdfunding. After the preferred investors have been paid, the remaining dividend payments are distributed to common stockholders. As a result, if the crowdfunded project is successful, the preferred equity investors will be paid on a regular basis.
Preemptive rights are also available to preferred equity owners. As a result, they have the option of investing in future financing rounds. Hence, they can avoid dilution by converting some of their preferred stock into common stock. This, too, is dependent on the type of preference shares chosen by the investors.
Although the fees for preferred equity are slightly higher, such investors are protected in the case of a corporate liquidation. The sponsor focuses on protecting the investors in riskier crowdfunding business that have a higher risk of losses and under performance. As a result, when the project comes to an end, the proceeds from the sale will go to the preferred shareholders first.
Benefits of Preferred Equity crowdfunding
The following are some of the benefits of investing in real estate through Preferred Equity Crowdfunding:
- A steady source of income:
Preferred equity crowdfunding, if the crowdfunded project is successful, investors earn a steady stream of cash.
- Dividends Preference:
Preferred equity crowdfunding investors are given first consideration when dividends are paid from the crowdfunding deal’s revenues. Preferred equity investments often pay a dividend equal to a percentage of their share value.
- Liquidation Preference:
The preferred equity owners are protected from losses when a business is liquidated due to poor performance or mismanagement. This is due to the fact that they are the first in line to receive the selling earnings.
- Favourable tax treatment:
Preferred equity investments, like equity crowdfunding investments, can benefit from tax advantages in the form of depreciation deductions.
3. What is Debt Crowdfunding investment?
Debt Crowdfunding investors operate as a lender to the property owner’s deal sponsor. Such investments are basically a loan or a mortgage investment that is secured by the property. As a result, investors receive a quarterly or monthly fixed rate of return and fixed interests.
At the bottom of the capital stack are debt-based crowdfunding investors. As a result, they have first claim to the project’s revenues. The debt investors must receive their predetermined payments even if the property is liquidated or fails to produce the projected earnings.
Benefits of Debt Crowdfunding
The benefits of debt crowding investment are:
- Shorter holding time:
Those investments, unlike the other two types of real estate crowdfunding investments, have a shorter holding duration of 6 to 24 months.
- Stable income:
Real estate debt crowdfunding investment yields a consistent and frequent stream of income. Real estate investors can earn a stable income of 8 to 12 percent each year here.
- Lower risk:
Debt investors in a crowdfunding project face lower risks because they are at the bottom of the capital stack. Debt investors are paid first, even if the project sponsor or the property owner defaults. Furthermore, they have the option to file for foreclosure in order to recoup their investment losses.
Types of Real estate Crowdfunding investments – how can you know which one is right for you?
Finally, it is up to the investor to decide which of the three types of real estate crowdfunding investments is the greatest fit for them. When considering real estate crowdfunding investments, they must consider their risk tolerance and liquidity preferences.
Preferred equity and equity investments strike a balance between risks and long-term gains. Debt investments, on the other hand, provide a consistent income stream and predictable yields while posing fewer risks. As a result, using the finest crowdfunding option to invest in real estate can help you build wealth at a fraction of the cost.