An Ultimate Guide to Property Crowdfunding
Property crowdfunding is a phenomenon where multiple investors contribute to financing one or multiple property projects. Depending on the terms of the investment, investors can invest either as equity or debt investments.
The two forms of investments warrant the investor proportional returns from the whole project. Just like in any other business, property crowdfunding investments require consideration of various factors to ensure you don’t put your money into waste.
Earning returns will take some time. Those who invest in equity normally wait for 3-10 years while those who invest in debt plans wait for 2 years at most.
If you invest in a project and agree to be paid in 3 years’ time, you will receive quarterly payments every year. The remaining balance is normally cleared on the final 3rd year.
Types of Property Investment Plans
There are literally two main types of crowdfunding property investments. Equity and debt investment plans. Equity investment is when you are investing in a property project or a group of projects.
In debt investments, people invest in a mortgage or group of mortgages. Equity investments are long term investments and it will take time for one to accrue profits. Equity profits are larger compared to debt investments.
Crowdfunding Equity Investment Plans
When you invest in crowdfunding equity plans, it means you will only earn profits if the project comes into full completion. Rent and property sales are what make equity investors reap profits.
Owing to the nature of the investment, it may take a lot of time for equity investors to start harvesting profits especially if one invests in multiple projects.
Some projects could take up to a year to come to competition. The good thing about this kind of investment is that you earn lots of profits and for long.
This is especially if you invested in rentals where tenants pay rent every month. You don’t manage the property yourself, it is managed so your work is just to invest and wait for returns.
There are two types of common equity investments, crowdfunding common equity investment and preferred equity investment.
Common Equity Crowdfunding Investments
This is where you invest to buy a section or proportion of the actual project. You receive proportional ownership. The returns will be proportional divided based on your project ownership percentage.
All rental income, property appreciation and another source of revenue generated by the property will be proportionally divided.
It is a good investment plan but the risks that come in are, what if no tenants occupy? What if appreciation doesn’t happen as planned?
This means you will end up making losses. The potential of high return on investment is very high that why people prefer this form of investment.
Preferred Crowdfunding Investments
This is a form of investment where investors receive monthly returns from rental income and property appreciation. Investors don’t wait for long as compared to common equity but you are subjected to tax deductions just like a person who receives a monthly salary.
Returns are fixed and they are all from rental income so if no rental income is collected, you don’t get your income or returns.
Crowdfunding Debt Investments
This refers to a situation where investors lend money to property investors with an agreement to receive back their money from the property revenue. The security of these loans offered to the investor is the property itself.
Investment takes between 6 months to 2 years and the interest rate could be between 8 to 9 percent. You don’t choose when to exit because everything is decided at the very beginning when you are lending the money to the investor.
In debt investment, there are two types of investments which include syndicated debt and platform issued debt.
Syndicated Debt Crowdfunding
This is where an investor lends money to service a proportion of a loan that was offered by money lenders. The money lenders stand as security for the loan because they comprehensively research it before approving it.
Middlemen charge a fee of between 0.5% – 1.5% every year. You will receive returns of between 8% – 12 % and it takes 2 years or less for you to start receiving income.
The property is the security so it is very rare for people to lose their money. For faster liquidity, this is the best form of investment compared to equity investment.
Platform Issued Debt
As the name suggests, this is where an investor uses money contributed by lenders on the crowdfunding platform to invest in the property. Lenders will receive 0.5 – 1% more in returns compared to the syndicated debt investments.
A typical platform issued debt takes 6 months to 2 years to start giving returns. You can receive your money and still invest in other projects if you want because it is not kept for long.
Property crowdfunding investments are wonderful because it gives people the opportunity to own properties even with little capital. Just make sure you choose the best plan so that you don’t earn losses. It is a nice way of earning money without hassles because you earn rentals without being a landlord.