Investing in Real Estate via Crowdfunding

Traditional way of investing in real estate

Real estate investment is not new to Australians. According to the statistics from REA Group Ltd, the annual growth rate* of the top ten performing suburbs is from 17% to 26.5% and the rental yield** is from 7.7% to 14.3%.

It is so obvious that investing in real estate would provide investors a good return in both growth rate and rental yield. Along with matured market and stable political environment, Australia’s real estate market attracts not only local investors but also overseas investors.

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We observed that more people are trying to get into this market at their younger age. The obstacle is also obvious that is the property price is too expensive to afford for the younger generation. Taking the statistics from REA’s top ten performing suburbs for example, the median price*** ranks from $485k to $3.34m. If a person wants to invest for $485k, he/she needs to save at least 20% as a deposit which is $97k. This could take approximately 5 years or even longer.

The question is whether there is an alternative way to invest in real estate with less barriers? The answer is positive – crowdfunding!

What is crowdfunding

Crowdfunding is the practice of funding a project or venture by raising small amount of money from a large number of people. With crowdfunding, investing in real estate becomes practical for those who do not have a large amount of deposit at hand. Instead of directly purchasing a property, people can purchase shares of a property project through equity crowdfunding. For instance, a property project requires $3m to perform activities from land purchase to development. Anyone who supports this project can contribute in this project. The contributed amount could be just $1,000. Investors can enjoy the returns from rental incomes or profits of property sale via dividend payments.

Crowdfunding practice in property investment

In January 2018, ASIC issued a new type of AFSL that allows AFSL holders to provide crowdfunding services to public companies. In October the same year, this service is extended to proprietary companies. This provides opportunities for property development companies to raise funds from retail investors. In this case, the younger generation could invest in real estate regardless whether they have a large amount of savings.

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Crowdfunding as an alternative, could serve many purposes. Firstly, investors could invest with an affordable amount. As long as investors have done their research and are interested in investing in the project, they could contribute any amount to the project. Sometimes, project issuers may set minimum subscription, it usually will still be a small amount. Secondly, investors can invest in a property project straight away. This assists them to easily understand their investments. Thirdly, the cost of investment maintenance is lower than traditional ways. Investors can exit or get returns without long-term commitment. Property projects usually take 12-24 months to be completed and investors can get their returns from the rental incomes or profits of sale after that period of time. Some crowdfunding platforms also have secondary market where investors could sell their shares to exit.

Where are the crowdfunding platforms in Australia?

Real estate crowdfunding is in its early stage in Australia, but the practice is emerging. There are several platforms that provide property projects on the market. Galaxy Crowdfunding in Melbourne is a key player in the area along with a few Sydney based equity Crowdfunding platforms all provide retail investors the opportunity to buy shares in property projects. 

As an investor, it is always essential to remember that equity crowdfunding is risky. Investors could lose their whole investments and the returns are not guaranteed. It is important for investors to conduct due diligence including check with ASIC to ensure a Crowdfunding platform you intended to engage with a valid AFSL to deal with equity Crowdfunding and ask questions prior to making any investment.

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Data sourced from: https://www.realestate.com.au/invest

*The compound annual growth rate in median price, comparing the median price of property sales in the preceding 12 months to the median price of properties sold in the same 12 month period 5 years ago. Data current as of 1 February 2019. Median data for 3 bedroom unit configurations are calculated off 3 or more bedrooms. Data supplied by Hometrack Australia.

**The median advertised rent as a percentage of median price over the preceding 12 months. Data current as of 12 February 2019. Median data for 3 bedroom unit configurations are calculated off 3 or more bedrooms. Data supplied by Hometrack Australia & realestate.com.au.

***The price of a property that falls in the middle of the total number of properties sold over the preceding 12 months. Data current as of 1 February 2019. Median data for 3 bedroom unit configurations are calculated off 3 or more bedrooms. Data supplied by Hometrack Australia.

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