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While entrepreneurs have been using crowdfunding to finance a huge variety of projects for years it is really just now catching on in the real estate industry. So how can crowdfunding be used for wholesaling properties and why try it?
Even though millions of dollars have been raised with real estate crowdfunding for everything from green supermarkets to reviving community buildings and even home purchases it is surprising how many real estate investors and Realtors are completely unaware of its existence and how it works. This is pretty shocking given the amount of attention it has received in the press recently. Fortunately it isn’t too late to leverage it.
As the term suggests crowd-funding essentially means raising money from the crowd (public or other investors) to fund a project. This provides another alternative source of capital for financing real estate deals and developments.
Different types of strategies
There are a number of different types of strategies which can be deployed here. Most property industry experts are already familiar with the concept of pooling money from other investors to fund a project and offering a return in exchange. However, other options here include giving up a piece of a new entity for buying, selling or holding property, or raising contributions without giving up any ownership or fixed rates of return.
Crowd funding can be used for wholesaling properties of all types from land and lots to commercial real estate projects in all sectors as well as houses and portfolios of rental homes or bulk sales of distressed properties.
There are many advantages of this type crowdfunding for real estate developers of financing for wholesaling properties. There are transactional lenders and commercial mortgage lenders which may offer access to short term cash for these purposes, however they still require paperwork, can slow down the process and their fees can dig into profits while putting increased pressure on investors. This alternative can be used for speed to grab better bargains and take down far larger parcels of land or multi-million dollar homes as well as entire portfolios which would otherwise be totally out of reach for the average solo investor or small investment group.
Recommended for end buyers and investors
It can also be recommended for end buyers and investors too. This could help move properties faster and for a premium. The desire to scoop up masses of U.S. real estate is out there, yet access to credit remains the one real hurdle for most. This can help those on all ends to leap this obstacle with ease.
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ASIC will come back with the framework
ASIC will come back with the framework in a few months and then a new class of licenses called crowdfunding platform licenses would start getting issued. It is expected that this process and the first true retail equity crowdfunding offers to take about 6 to 12 months.
Equity crowdfunding for all its fancy connotations is essentially an investment. The only difference is that the delivery and service vehicle is online. So the same factors, which you keep in mind when making an investment such as duration, return, and risk, would still be paramount. Just the fact that it is online wouldn’t make you pick an investment, which offers significantly lower returns. In fact, because the process is online you would probably want to see a higher return and a stronger level of security behind the deal presented.
2 Million is a significant amount
While 2 Million is a significant amount for an early stage startup in terms of funding, it is not a large amount for a real estate projects. The second issue is we are in an era of unprecedented liquidity. One prominent Melbourne area developer aptly told me, “We have money coming out of our bums!” The only developers who are scrounging for small amounts are those who don’t have the credibility to secure these funds – The classic “Lemons” problem of Economics. You don’t want non-quality projects listed on the platform. If the first few projects go belly up, it will destroy crowdfunding platforms for good in Australia.
So if we are going to make crowdfunding real estate happen, the projects that are listed have to be from quality developers. These are in turn larger projects, which have the advantage of securing quality project managers, auditors, builders and surveyors that give it a better chance of success. The size of the project also means that there is more return on offer, which would make it more attractive to potential investors.
