Crowd funded property investment. If you’ve been watching the rapid evolution of the property investment industry, you may have noticed this trend. It’s billed as the way to make investing in property accessible for everyone. As a way to help the average Joe or Josie get a stake in a property they wouldn’t otherwise be able to buy. For example, prime commercial properties.
But what exactly does crowd funded property investment look like? How does it work? Who’s doing it? And is it right for your portfolio?
What is crowd funding?
Crowd funding is the practice of funding a project or new business by raising a little bit of money per person, from a large group of people. Hence the ‘crowd’ part. When a developer or entrepreneur asks for crowd funding cash, they usually offer a defined benefit in return. That’s what differentiates it from a company with shareholders. In return for their contribution, crowd funders often get a set reward. This reward could take a variety of different forms. For product development, it’s often access to the first batch of products to come off the production line. For social enterprises, it might be supporter merchandise like t-shirts or stickers. The design of the reward is often just as important as the ingenuity or the novelty of the project itself.
Arguably, crowd funding is largely a product of the internet. Because projects require a huge volume of backers to get off the ground. And the internet is unrivalled in its capacity to attract, collect and organise people from around the world interested in different projects. Even though it’s technically ‘public’, crowd funding is free of many of the constraints of taking a company public. It’s also a lot more accessible than private venture capital. One caveat is the funding targets. Most platforms have a rule that if a certain funding target isn’t achieved by a certain date, the funders get their money back.
Several of the world’s crowd funding platforms have become household names. For example, there’s Kickstarter. Kickstarter has spawned a series of successful products and brands. Including Pebble smartwatches, The Micro 3D printer, and the 3Doodler and LIX 3D printing pens. Indiegogo is another well-established platform. It’s responsible for Flow Hive (a beehive box with a honey valve), Super Troopers 2 (sequel to cult comedy favourite), the Tesla Museum, and the soon to be released Sondors electric bike.
How does it apply to buying property?
At the basic level, property investment crowd funding is the same as any other crowd funding. A person or group creates a ‘project’ on a platform, and tries to attract funding from a wide audience. In the case of property, the project is to buy an existing property, or to build a new property.
The most popular projects are the ones that are well-defined, backed up by planning and research, and offering an attractive benefit or reward.
Real estate crowd funding projects are usually niche developments. These include boutique office blocks, small retail developments, or small apartment complexes. In other words, the projects that are ‘too small’ for big development companies and real estate investment trusts (REITs). With crowd funding, instead of buying a share in a large portfolio of properties, you can select a specific property. This is attractive to many investors, who like to have a sense of control and selectiveness.
Different platforms have different ways of returning money. For example, some buildings are developed and then sold for a profit. Crowd funders then receive a proportionate share of the profit, minus fees. Some projects involve setting up a unit trust to develop and manage a property. The crowd funders, as beneficiaries of the trust, then receive regular payouts.
The experience of finding a project and investing differs from platform to platform. But here are a few examples from US based platform Fundrise. Basically, you create an account with a few basic details, and log in. From a home screen, you can browse projects. You might be able to sort by location, scale, type, or operator. For example, you could look for a residential building in your neighbourhood. You’d then read the details of the project, including who’s managing it, where it is, how long it will take, how much it will cost, how much the minimum buy-in is, and what the return is. Then, you order a unit online. Over time, you can build up a portfolio and view your progress on a profile page.
Which organisations are doing it in Australia?
There are a small handful of companies offering crowdfunded real estate investment in Australia. Some of them are open to investors of all sizes, types, and means. Others are open only to ‘sophisticated’ investors. Under current Aussie legislation, some crowdfunding structures are limited in the number of investors that any one project can have.
Arguably the most high profile platform is CrowdfundUP. It’s based in Perth, and facilitates projects around the country. The company bills itself as ‘a property crowdfunding platform which allows investors access to high end property developments and investments while providing property developers with an effective tool to broaden their investor base and facilitate capital raising online.’ In other words, it’s an online marketplace for crowd funded property investment.
Then there’s DomaCom. DomaCom doesn’t use the word ‘crowdfunding’ to describe what it does. Instead of being just a platform, it’s also a registered managed investment scheme. DomaCom bills itself as a ‘fractional property investment platform’. This is how it works:
[Click to enlarge]
Basically, you open an account, choose a property, and get units issued in a sub-fund. You don’t go on the actual title to the property. Rather, that’s held in trust for you. If the property makes money, you get a distribution (dividend) based on the number of units you hold.
That’s an example of what this burgeoning industry is calling ‘equity based crowd funding’. Instead of getting a set reward, you get equity in the finished property.
Estate Baron is a relative newcomer to this game. They’ve only got two projects open at the moment. Right now, they’re limited to Melbourne. The minimum buy-in is $2,000. Each project varies in terms of the benefit. Some are unit trusts. Others are companies, so when you buy in, you actually become a shareholder.
Finally, there’s BrickX. BrickX is very smartly branded indeed. They call each fraction or unit a ‘brick’. Each brick gets a share of monthly income. It’s distributed monthly. And users can sell their bricks on the ‘Brick Exchange’ for a capital gain. Like other platforms, users get to choose specific properties. The management fee is 5%. At the moment, there are three properties on offer. At the time of writing, the cheapest brick price was $67. For that, the estimated ROI was 7.93%.
How to they compare to overseas operators?
In Australia, real estate crowd funding is a relatively new thing. Unsurprisingly, regulations haven’t really caught up. However, there are a few existing regulatory structures that platforms can use. For example, a platform can set itself up as a business introduction or matching service. Under this classification, each project can only have 20 offers or invitations. (If you’re interested, click here to find out more).
Otherwise, the program has to be registered with ASIC as a managed investment scheme.
Surprisingly, Aussie platforms have faced fewer regulatory hurdles than US programs did a few years ago. ASIC has taken a liberal approach to regulation. That is, they’re not interested in regulating it unless it’s to do with a financial product or service. In late 2012, ASIC commissioner Greg Tanzer said:
‘Crowd funding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by ASIC. However, depending on the particular crowd funding arrangement, ASIC’s view is that some types of crowd funding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document. These activities are regulated by ASIC under the Corporations Act and ASIC Act.’
In the US, it went the opposite way. The SEC was very cagey to start with. Only licensed investors were allowed to buy in to these schemes. Then came the JOBS (Jumpstart Our Business Startups) Act. It was signed into law in April, 2012. One of the main things it did was increase the number of shareholders and entity could have before having to register with the SEC. It also changed the way crowd sourced equity could be marketed. But the Act has been slow coming in to force. It wasn’t until late March this year that the SEC elected to approve and release the rules for the final title of the Act.
5 things to ask yourself when considering a crowd funded property program
- Is this platform fully transparent?
Do you get a lot of information when you look at projects on a platform? Is it easy to get in touch with either the platform managers or the developers? Can you access all the details and records you need to make a fully informed decision?
- What are the fees and costs?
What kind of management fees does the platform charge? Are those fees better than what a REIT (real estate investment trust) would charge?
- What kind of return is offered?
Is it a monthly, quarterly or annual payment? Does the money come from rental income? If so, who’s managing the property?
- Is the management team trustworthy?
Are the platform managers experienced in the real estate industry? Do they have the qualifications and experience to pick quality projects?
- What does my advisor think?
As with any investment decision, it’s important to get independent advice. Even if you’re only thinking of investing what you consider to be a small amount. Ask your financial advisor or planner whether crowd funded property fits with your overall investment needs and goals.
While you wait…
Many platforms aren’t open to retail investors yet. For example, BrickX is currently only open to sophisticated investors. If you’re looking for a way to add property to your portfolio now, you may wish to consider property related stocks.
There are a number of different property plays on the ASX. Different stocks give you exposure to different parts of the property market. For example, you could choose to focus on residential property. Or even more specifically, aged care. Or you might wish to focus on retail property.
The main difference between property stocks and crowd funded property investment is that you don’t get to choose which specific properties you invest in. But depending on your needs, that might be a good thing. If you’re relatively inexperienced when it comes to property, or you don’t have the time for research, you may prefer to have the decision taken out of your hands.
‘Three Best Investments in Australia for 2015 and Beyond’ is an exclusive free report by Money Morning publisher Kris Sayce. In this report, Kris explains why property stocks are well worth your consideration. He also reveals three outstanding stocks you could buy to get you started. One is an index fund. One is a diversified developer and manager. One is a property trust that leases to one of Australia’s biggest retailers. Read this report and you’ll also discover two other investments that Kris believes are must-haves for your portfolio.
Contributor, Money Morning