Many, especially those not conversant with the Real Estate sector and its many modern trends, not only in Nigeria, but globally, may want to know what crowdfunding is all about. Though crowdfunding in Real Estate is a new terminology, but its practice has been with us for several years now.
Simply defined, Real Estate crowdfunding is a system whereby a group of investors collectively pool capital together to make an investment and later gain returns based on the percentage contributed. It could be family members, neighbours or organisations coming together to purchase a property and enjoying the return on investment as per the capital contributed.
However, due to technological advancement and the high level of professionalism in the Real Estate sector today, crowdfunding has grown to an equity type of market. It now entails the recognition of a lucrative real estate investment by an experienced realtor who is not able or willing to fund the investment himself. He rather opens up a window of opportunities for individual investors to invest in capital. The lump sum enables him to raise enough capital for the execution of the project(s)
According to a recent World Bank’s report, it is estimated that in the next five years (2025), the crowdfunding sub sector investment will peak to about $93billion, just as it recorded a $5.5billion growth in 2017.
From the foregoing report, it is obvious that real estate crowdfunding has a bright future as it is estimated to contribute in the near future over 10 percent of the real estate investments globally.
In Nigeria, like many other countries in the world, real estate crowdfunding is gaining currency.
Here are 8 reasons why real estate crowdfunding should be considered by prospective investors.
· Minimum investments. One does not need huge capital or to borrow huge amount before venturing into crowdfunding, unlike the much funds required for one to start a real estate investment portfolio.
· Allows for portfolio diversification. It reduces risk and optimizes earning as investors can invest in diverse properties in the real estate market.
· It is regulated and transparent. Crowdfunding in real estate is usually registered and has a structure to back investment; it also allows monitoring of results.
· Easy and convenient\less paper work and time. Many investors go online and via other digital platforms to select, invest, pay and receive dividends or shares on properties.
· Gaining of market insights: Investors are usually abreast of how property investment works, rental performance and market volatility.
· An alternative to stocks: Because of the lower risk involved and its less volatile nature to market situations, especially in this pandemic period, many investors now opt for crowdfunding in real estate.
· Investing in your community. Real estate crowdfunding provides opportunity for investors to invest in their communities, thereby contributing positively to the economic and infrastructural development of such communities. It also connects local residents, community organizations and other stakeholders by allowing them to directly invest in local real estate.
· No property management hassles. In real estate crowdfunding, one is not faced with hassles associated with being a landlord. It allows one to invest while leaving property management to the deal sponsors.
However, it must be emphasized that despite the many rosy sides of crowdfunding, a lot of factors must be considered before one venture into the sector. It has its flip side and if care is not taken, such an investment could go awry.
Factors to consider before choosing real estate crowdfunding service
· Study the local market: It is imperative to research about the local property market you want to invest in. There is no need to be in a hurry or too excited about a particular property. Also, consult other real estate agents on the planned investment.
· Know the holding period in your investment: It is important to also have a clear understanding of the holding period in your real estate crowdfunding. Holding period means when the investment liquidates, and it is advisable to invest in illiquid assets and use fund you don’t need on the short run.
· Profitability potential: This implies calculating the Return on Investment (RoI) in terms of what profits to expect in the planned investment over a period of time. This will serve as a guide to the investor whether to commit his capital or not into the business.
· Measure for the best deals to invest in: It also affords the investor the opportunities to know which of the lots is the best deal to invest in, via cash target or Internal rate of Return (IRR).
·Issues of Management\Administrative fees and other exigencies: A prospective investor must take into consideration calls for more investment, exit capitalization rate and equity, among others.
On a final note, extra care need be taken by a would be investor in real estate crowdfunding, especially in Nigeria where there is no firm legal backing to real estate deals. It is necessary to advise that there should be thorough research, calculations, evaluation and appraisal before one ventures into the sector.