The common question among many intending property investors in Australia is, “Does crowdfunded real estate investment still work in Australia?”
The answer is a simple and straightforward yes, as real estate crowdfunding is still gearing up in the Australian property market. According to Appello, the Australian real estate crowdfunding market is expected to be worth approximately $868,982 million in 2027. That’s huge, considering the market was worth $20.73 million in 2017.
Now that you know crowdfunded real estate investment still works in Australia, let’s discuss what it is and how you can participate in the industry.
What is Crowdfunded Real Estate Investment?
Crowdfunded real estate investment is an investment financing approach in Australia that allows multiple individuals or businesses to pool funds together to invest in a real estate project.
It leverages the power of collective funding to finance a property development or purchase, enabling investors with varying capital levels to participate in real estate projects that might otherwise have been out of their reach.
How Crowdfunded Real Estate Investment Works
Crowdfunded real estate investments are facilitated by crowdfunding platforms operated by companies that serve as intermediaries between property developers and investors.
The process is simple. The platforms provide a digital space for real estate property developers to present their projects, outlining their nature, expected returns, risk factors, and development duration. Real estate investors now come to this digital space to browse and select investments that align with their risk tolerance and investment goals.
Each investor’s contribution is pooled with others to meet the total amount required for the real estate project. Depending on the developer’s crowdfunding model, investors may get ownership shares in the form of equity or debt.
In equity-based crowdfunding, the investors become part owners of the property, sharing profits and losses. While in debt-based crowdfunding, the investors lend their money for the project’s development or purchase and receive interest payments and, eventually, the return of their principal.
You can only realize returns on investment when the project generates income or appreciates in value. The exit strategy depends on the predetermined methods presented by the developers. Once you realize profits, you can distribute them to the investors according to their contribution ratio.
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Benefits of Real Estate Crowdfunding
Here are some of the benefits you can get as a real estate crowdfunding investor:
Low-Cost Entry into the Real Estate Market
Crowdfunding real estate projects often have lower investment requirements than traditional real estate investments.
It enables a wider range of investors, especially those with small investments, to participate in high-quality real estate projects traditionally reserved for larger institutional investors.
Portfolio Diversification
Another benefit of crowdfunded real estate investments is portfolio diversification. It enables you to spread your investment capital across multiple real estate projects instead of concentrating on one property.
When you diversify your portfolio, it enables you not to lose your entire capital to one project when it fails, as the poor performance of one project in a portfolio is easily offset by the good returns of others.
Increased Liquidity
While traditional real estate is considered a less liquid asset, crowdfunded real estate investments may offer investors different means to access their funds before the completion of the project. This might be providing investors access to the secondary market, where they can sell their shares at any time.
Professional Management
Crowdfunded real estate investments are managed by professionals with years of experience in the industry. This reduces the burden on individual investors who don’t have the skill set required to manage such properties.
Potential for Higher Returns
Investors can earn returns through rental income, property appreciation, or interest payments, depending on the investment structure. This provides opportunities for you to earn higher returns than what’s obtainable in a traditional real estate investment.
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Drawbacks of Real Estate Crowdfunding
Here are some drawbacks of real estate crowdfunding you must consider before putting in your funds:
Risk of Project Failure
Real estate development has inherent risks like construction delays, cost overruns, and unforeseen market fluctuations. These risks could cause the failure of a crowdfunded property investment, leading to a loss of capital for the investors.
Lack of Control
The day-to-day management of crowdfunded real estate investments lies in the hands of the project sponsors. This leaves the investors with limited control as the project sponsor makes key decisions, such as making changes to the development plan or arranging for the purchase or sale of the property.
Lack of Liquidity
While crowdfunded real estate investments are generally more liquid than traditional investments, the ability to sell or exit investments can still be limited. Often, investors may need to wait for a project to be completed or for a secondary market to be available to sell their shares.
Platform Risk
The credibility and reliability of the crowdfunding platform are other important considerations, as they determine, to a great extent, the success of the project.
If a platform experiences financial constraints or engages in fraudulent activities, it will affect people’s investments.
Dilution of Returns
Since crowdfunded real estate investment involves multiple investors sharing the projects’ returns, it typically dilutes the returns. This is a major drawback for investors looking to earn higher returns.
Where to Find Real Estate Crowdfunding Opportunities in Australia
As established earlier, the Australian real estate crowdfunding industry is still evolving, with different crowdfunding platforms sprouting yearly.
Here are a few notable crowdfunding platforms you can use to participate in real estate crowdfunding:
1. VentureCrowd
VentureCrowd is an Australian crowdfunding platform that offers returns between 9% and 12% per annum on fixed-income investments. It currently has over 74,000 investors contributing to its real estate projects.
As one of Australia’s oldest real estate crowdfunding platforms, founded in 2014, VentureCrowd has a track record of success that speaks for it. It has successfully raised over $310 million in crowdfunding and has paid out $20 million to investors.
2. Propoty
Propoty is another real estate crowdfunding platform that lets you invest in the Australian property market for less than $20,000. Its returns range from 9% upwards.
3. DomaCom
With as little as $1,000, you can invest in the Australian property market through DomaCom. It’s one of the country’s most popular fractional property investing platforms.
As of June 2023, DomaCom has over $216 million worth of assets under its management.
4. CrowdProperty
CrowdProperty enables you to earn up to 8.5% annually, backed by first mortgage security. Founded in 2014, it has successfully funded 1,403 properties worth over $456 million.
If you’re looking to crowdfund properties outside Australia, CrowdProperty gives you the opportunity to invest in properties in the UK.
What is the Rate of Return for Real Estate Crowdfunding?
According to Investopedia, the returns on real estate crowdfunding range from 2% to 20%. Some Australian crowdfunding platforms also offer more, depending on the structure of the project and the number of investors contributing to it.
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Conclusion
As stated earlier, crowdfunded real estate investment still works in Australia. It’s still evolving and will amount to more in the future.
Crowdfunded real estate investments allow you to diversify your investment funds, earn returns on multiple properties, and gain low-cost entry into the Australian property market.
Hopefully, this article has given you insights into how crowdfunded real estate investment works and how you can leverage it to grow your wealth in Australia.
