With real estate crowdfunding (also known as property crowdfunding), numerous investors contribute small amounts to purchase property or property development projects. A crowdfunding platform, like VentureCrowd, facilitates this, vets investment and development projects and brings investors together.

Traditional property investment requires a considerable amount of capital. Pooling funds from many investors makes property investment far more accessible. Investors can enter the property market from as little as $100 or $1,000 depending on the platform.

VentureCrowd’s financial services licences for property investment

The VentureCrowd corporate group includes two subsidiaries that each hold a separate Australian Financial Services License (AFSL). These are:

VentureCrowd Pty Ltd, holding AFSL No.503381 which includes, among other things, an authorisation to operate a crowd-sourced funding platform under the new equity crowdfunding amendments to the Corporations Act 2001.

Guardian Securities Limited, holding AFSL No.240506 which includes, but is not limited to, an authorisation to operate retail managed investment schemes registered with ASIC and to act as a Responsible Entity.

Collectively these valuable AFSLs enable VentureCrowd to provide a comprehensive range of financial services to investors.

How real estate crowdfunding works

With real estate crowdfunding you look for investments online, sign paperwork to invest in properties and development projects, transfer funds, and monitor how investments are going. If you choose a reputable platform like VentureCrowd, you’ll have access to vetted investments rather than having to do time-consuming due diligence on investment options.

Property investments usually involve three parties: the sponsor, the platform, and the investor. The sponsor is the person or company who oversees the investment, buys the property, manages the property and/or development, and arranges for the eventual sale. 

The crowdfunding platform is where sponsors and investors come together to raise capital. The platform evaluates projects and sponsors, ensures investors and deals meet requirements, and checks for compliance and regulatory issues. 

The investor is the party who contributes funds and receives income and/or a profit when the property sells at a profit.

How we do real estate crowdfunding at VentureCrowd

At VentureCrowd, we offer a unique approach to real estate crowdfunding whereby our property team comprises developers and end-to-end property managers to oversee the development of a project. This enables us to manage the quality and feasibility of a project, from the selection of land development all the way through to the construction and eventual sale of the property. 

On VentureCrowd, you invest in a fund that’s managed by VentureCrowd under one of our two Australian Financial Services Licenses, or you invest in a proptech company that we are capital raising for.

We manage the investment on your behalf, so you don’t need to deal with an underlying company. You simply monitor and manage your investment through your VentureCrowd investor dashboard, and we report back regularly to let you know how the project is progressing and pay returns into your nominated bank account.

VentureCrowd funds differ from many other funds because we enable you to invest in specific projects, rather than a range of projects selected by a fund manager.

Property development project selection at VentureCrowd

When you invest through VentureCrowd’s platform, you save yourself from having to do exhaustive research and vetting. Our property experts conduct in-depth research and hand-select all property deals. 

There are basically six fundamental property market drivers we look at when deciding whether to invest in a particular suburb and we commission independent reports to substantiate those:

  • Economics and employment
  • Population growth and demographics
  • Infrastructure investment and government spending
  • Supply and demand
  • Location and lifestyle factors
  • Affordability and the availability of money

What are the different levels or stages of the property capital stack?

Property investing has different investment layers with different risks and returns.

At VentureCrowd, we refer to 3 commercial property development investment layers. These comprise the property capital stack where each layer has a different investment term, return and risk attached to it.

When investing in real estate through an online marketplace, platform or other means, understanding any given development’s capital structure and associated risks is key to diversifying your portfolio optimally.

Essentially, your position in the stack determines when you will receive payments and whether you have any controlling interest over a property.

Learn more about the Property Capital Stack below.

What are the different levels or stages of the property capital stack?

  1. The acquisition stage

This stage usually involves an equity raise, ordinary shares. Unlike debt investors, equity investors target a Return on Equity (RoE) which typically translates into higher returns than the other two investment levels. This level carries more risk, however.

  1. The civil works stage

During the civil works stage, development funds usually offer mezzanine or preferred equity to investors in a series of tranches. These are fixed income securities that offer passive recurring income to investors. Mezzanine debt is not secured by the property but by a pledge of the ownership interest. It carries a slightly higher risk profile, but it is generally considered less risky than a common equity investment because the site value is higher after DA approvals and acquisition.

  1. The construction stage

In VentureCrowd, First Mortgage Fund is another debt-based or fixed income security that pays regular passive income to investors. It sits at the top of the real estate capital stack and is home to high-priority debt—debt that would be paid out first in case of default. Because of this, First Mortgage Debt is considered to have a lower risk profile than other types of debt.

What are the benefits of real estate crowdfunding?

Enter the property market with less outlay

With real estate crowdfunding, you don’t need to be a professional investor to invest. This enables a wider group of people who want to invest in property but may not have the funds to do so directly or who may want to diversify their property investments with smaller amounts of money. At VentureCrowd we are passionate about democratising investment so we can collectively make a bigger impact and enable more people to invest.

Diversify your investment portfolio 

Since you don’t need to invest large amounts of money in a single investment project, you can diversify your investments over a few projects to spread your risk and enter the real estate market without having to purchase a property outright. Investors also aren’t limited to local or regional investments. Via real estate crowdfunding platforms, you can invest in projects practically anywhere.

Earn passive income.

With real estate crowdfunding you can earn passive income from your investments. With equity investments, you can earn rental yields and then a share of the profits should the development sell at a profit. With fixed income investments, you earn regular interest over the investment term and then your principle is returned to you upon completion of the project or upon sale. That said, you should always consider the risks of the property investment you want to back so you are clear on what could happen to your funds should something go wrong.

The platform manages the fund.

With real estate crowdfunding the platform manages the fund so you don’t have to. While there is typically a small fee for this, it enables you to simplify your investments while still receiving regular returns.

Your investing experience is digitised.

Crowdfunding platforms are generally accessible and easy to navigate. You can access your account 24/7 and some platforms even offer mobile apps. You can contact the team when you need extra support and most platforms provide regular project updates.

You can earn higher-yield returns.

On platforms like VentureCrowd, you can earn higher-yield returns than in term deposits. While higher returns are never guaranteed, at VentureCrowd we generally target returns between 9 and 12% p.a. for fixed income investments, whereas a term deposit will generally earn you around 1.5 to 4% p.a.

You can invest with flexibility.

When you can diversify your investments you can choose to invest across both equity and debt investments to maximise returns and minimise risk. Equity investments typically offer a capital upside, are first in and last out of a project so the investment terms are longer, have fewer fees and hold more risk. Debt investments offer a fixed return based on your investment amount, have shorter terms and are less risky because they are property-backed securities. They may, however, have more fees.

What are the drawbacks of real estate crowdfunding?

Real estate crowdfunding is an alternative investment option.

Real estate crowdfunding is considered an alternative investment option compared to more mainstream options like investing in the stock exchange or buying a house outright. As such, many people don’t know about real estate crowdfunding or they are wary of how it works. At VentureCrowd we aim to provide a transparent investment process and good-quality information on crowdfunding to help investors learn about this alternative investment type.

You pay platforms fees.

Most crowdfunding platforms charge fees to manage your investments. These are typically between 1 and 3% of a paid asset’s value. On VentureCrowd we clearly lay out our fees on our deal pages and in information memorandums about each property investment.

The asset you invest in is illiquid.

When we say an investment is illiquid, we mean you cannot cash out during the term of the investment. While you can expect regular returns in most cases (depending on the investment terms), your principle may be tied up for longer if a property sale is delayed. For instance, equity investments may be tied up for up to 10 years, while debt investments may only be tied up for two years. At VentureCrowd we aim to keep terms relatively short for our investors and offer different tranches to minimise the term lengths and optimise returns.

There may be tax implications.

It’s important to understand how any investment may affect your taxable income before you invest. The investment Information Memorandum for any project should include information on tax implications but it’s always a good idea to seek independent advice from your accountant.

How to get started with real estate crowdfunding?

First, do your research on the various crowdfunding platforms to ensure you’re comfortable with the terms, the company and the projects you want to invest in. Property (and equity) crowdfunding is a fairly new investment option, so it pays to be vigilant. Any investment carries risks, so consider choosing a platform that complies with legislation, has robust project selection criteria, due diligence processes and an excellent reputation.

Whichever level of the property capital stack you’re comfortable with, our aim here at VentureCrowd is to empower you to back what you believe in and access impactful property investments that allow you to diversify your portfolio.

Further information can be found on the VentureCrowd website or you can book a call with their team. Any queries regarding VentureCrowd should be directed to VentureCrowd and not to Stockhead.

 

This article was developed in collaboration with VentureCrowd, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

 

Any documents linked or referred to in this article were not selected, modified or otherwise controlled by Stockhead.

 

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in the documents linked or referred to in this article.

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