HOW REAL ESTATE CROWDFUNDING WORKS

In this article, we are going to explore how real estate crowdfunding works, especially in a country like Nigeria. In doing that, we shall start by looking at the idea of crowdfunding in itself.

Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists. Crowdfunding contributors can include friends, family members, investment groups, personal investors, and those interested in the business venture. The goal is to attract as many potential investors as possible.

What is real estate crowdfunding?

Real estate crowdfunding has to do with raising capital for real estate projects by collecting small amounts of money from a large number of investors, typically via online platforms. This model allows individuals, who are the investors, to invest in real estate through their contributions, with its attending benefits, without needing significant capital or dealing with the complexities of direct property ownership. Real estate crowdfunding is, therefore, an innovative approach allows multiple investors to pool their resources together to invest in real estate projects, thus giving  access to the lucrative property market to a wide range of investors, who would not have been able to invest on their own because of the size of their capital.

With real estate crowdfunding, an investor does not have to bring a large amount of capital to invest in real estate; all such investor has to do is find a crowdfunding platform to put his resources and wait for the returns.

Crowdfunding was not until recently a popular model of real estate funding in Nigeria as the real estate industry in the country was characterized by high entry barriers. With the advent of crowdfunding, however, these barriers are gradually being dismantled. The rise of internet penetration and mobile technology in Nigeria has further fueled the growth of real estate crowdfunding platforms, making it easier for Nigerians to participate in real estate investments.

Today, real estate crowdfunding has become a popular funding model in Nigeria following models of other developed economies in the world.

We shall now delve into the concept of real estate crowdfunding, its benefits, how real estate crowdfunding works, the current landscape in Nigeria, and practical steps to get started.

How Real Estate Crowdfunding Platforms Work

Real estate crowdfunding works by leveraging technological platforms to democratize real estate ownership. These real estate crowdfunding platforms function as intermediaries between property developers, more popularly called real estate companies and individual investors. These platforms work by vetting real estate projects in need of investors, structure the investments, and manage the collection and distribution of funds. 

Typically, real estate crowdfunding works as follows:

1. Project initiation:

Real estate developers or property managers reach out to crowdfunding platforms to source for funding for their capital-intensive or specialized projects. Such projects could include large residential complexes, commercial office buildings, hotels, or industrial facilities. The platform then conducts due diligence on the proposed project, assessing the project’s viability, possible profits, and associated risks. The platform then approves projects that meet its criteria and post that for investment. 

2. Listing of property on the platform:

Having approved the property, the project is listed on the platform with detailed information on the project, such as the location of project, type of development, expected returns on investment, duration of the project and the minimum investment required. Interested investors can review available opportunities and choose projects based on their risk appetite, investment horizon and personal goals.

3. Fund Pooling

At this point, having been satisfied by the terms of the investment, investors go on to commit desired funds to the project. In other words, once an investor selects a project, they can invest their desired amount. The platform then aggregates funds from multiple investors to meet the project’s capital requirements. Once the goal is met, the project then proceeds.

4. Property Management and Development

With funding assured, the real estate developer proceeds with the acquisition, renovation, and or construction of the property, managing all the operational aspects of it. As the project goes on, the real estate crowdfunding platform provides regular updates to investors so that there is transparency throughout the project.

5. Ownership and Returns

Investors receive fractional ownership in the real estate project proportional to their investment. Returns are distributed based on the project’s performance, typically through rental income, property appreciation, or profits from property sales. In some cases, when the property is sold, investors may also receive a portion of the profits generated from capital appreciation.

6. Exit from real estate crowdfunding

Investors can exit a crowdfunded project following laid down guidelines. Most crowdfunding platforms offer exit strategies right from the get-go. In some cases, exits can occur when the property is sold, while in some cases, investors can sell their share of the investment to other investors on secondary markers provided by the platform.

Real estate crowdfunding types

There are two major types of real estate crowdfunding, both with its own advantages and disadvantages.

1. Equity-Based Crowdfunding: Equity crowdfunding is a type of startup funding where early-stage companies raise capital, usually through an online platform, from large groups of investors in exchange for small amounts of equity. Unlike most types of startup investing, equity crowdfunding is not restricted to accredited investors and allows non-accredited investors to participate.

The major benefit of this type of real estate crowdfunding is its potential for significant capital appreciation as the property’s value increases over time. Investors are also able to get ongoing income in the form of rental dividends.

However, there is higher risk involved as returns depend on the performance of the property. What that means is that if the property performs poorly on the market, then returns may be poor. Sometimes, investors may not even see returns until the property is sold or becomes profitable, which could take several years.

2. Debt-Based Crowdfunding: In this type of real estate crowdfunding, investors are essentially lending money to the property developer or real estate company in return for payment of regular interest based on the loans terms. Debt-based crowdfunding encompasses several different types of crowd based lending. These include mini-bonds, peer-to-peer lending (sometimes known as ‘peer-2-peer’ or ‘P2P’ lending) and invoice financing.

Essentially, a large amount of retail investors (the crowd) lends money through a platform to a business or individual. Examples of debt-based include:

1. Mini-bonds

Mini-bonds typically have a term of three to five years and offer rates of interest such as 7 or 8%. However, they are still relatively rare in many parts of the world including Nigeria.

1. Peer-to-peer lending

Peer-to-peer lending matches savers or investors with businesses seeking finance. The businesses pay lower interest rates than they would ordinarily and investors get a better return than they would with an ordinary bank or building society savings account.

The benefits of the Debt-based crowdfunding include more predictable returns due to fixed interest payments and lower risks compared to the equity investment option.

However, the disadvantages include limited upside potential as returns are capped by interest on the loan, and the potential for investors to lose their funds if the developer defaults.

Getting Started with Real Estate Crowdfunding in Nigeria

Now that you know how real estate crowdfunding works, if you are interested in a real estate crowdfunding investment, here are a few guidelines for you to follow:

i. Research and Choose a Platform

Research various crowdfunding platforms, read reviews, and compare their offerings. Look out for platforms that are reputable and have a record of accomplishment of successful projects, which you can then invest in.

ii. Understand the Investment Process

Familiarize yourself with the platform’s investment process, including how to fund your account, select projects, and track your investments.

iii. Carry out careful evaluation of projects:

Carefully review the details of each project, including location, developer background, financial projections, and risk factors. Consider seeking advice from financial advisors if necessary.

iv. Start with a small amount

Begin with a small investment to understand how the platform works and gain experience. Gradually increase your investment as you become more comfortable.

v. Diversify Your Investments

When investing in real estate crowdfunding, it is smart to diversify your investments across multiple projects in order to mitigate risks. Diversification helps protect your portfolio from the failure of any single project.

vi. Monitor Your Investments

Regularly check the progress of your investments through the platform’s dashboard. Stay informed about any updates or changes in the project’s status.

vii. Reinvest Returns

Reinvest your returns to compound your earnings and maximize your investment potential

Real estate crowdfunding challenges  to consider

Even though real estate crowdfunding offers numerous opportunities for investors as has been explained in this article, it also comes with challenges and risks that investors should be aware of:

i. Market Risks

Real estate markets are prone to volatility, and unanticipated occurrences, regulatory changes, and economic conditions can all affect property values. Investors need to be ready for possible losses.

ii. Associated risks with crowdfunding platform:

The reliability and performance of the crowdfunding platform are critical. It is advisable for investors to choose platforms that have strong security measures, transparent operations, and excellent customer feedback.

iii. Associated Project Risk

Not every endeavor will succeed in reality. Factors like construction delays, cost overruns, and market downturns can all affect project returns. Thorough project vetting can, however, help to mitigate these risks.

iv. Liquidity Risk

Real estate investments are typically long-term and illiquid. Investors should be prepared to tie up their funds for an extended period and may not have immediate access to their capital.

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