Fintech companies offer consumers an endless slew of financial products and services online, from stocks and bonds, to student loans, to real estate crowdfunding – and everything in between. As these product offerings proliferate, fintech has grown into a behemoth. At the midyear-2017 mark, fintech investment worldwide hit $8.4 billion, according to a report by KPMG. This growth has spawned competition in the sector, meaning consumers have more choices when it comes to investing their hard-earned dollars.
HomeUnion® is a fintech company that sells remote real estate and asset management services online. Just as an investor can purchase low-risk, balanced or high-yielding investment portfolios of equities, they can utilize our website to acquire cash-flowing real estate that meets their personalized investment goals.
Currently on HomeUnion®’s platform, an investor has the option to purchase two types of wholly-owned residential real estate: single-family rentals (SFRs) and multifamily assets. In other words, an investor acquire the whole property, including the land its situated on as well as the title.
As consumers grow savvier, so have fintech companies. One fintech innovation has truly revolutionized the way people invest: crowdfunding. In the early 2010’s, crowdfunding gained notoriety following the passage of the JOBS (Jumpstart our Business Startups) Act. This law allows businesses to broadly market formerly private investments to individuals.
Since then, the crowdfunding space has expanded exponentially: More than 150 companies offer consumers real estate crowdfunding real estate opportunities, MarketWatch reports. “While reliable numbers about this growing and fragmented market prove difficult to come by, research firm Massolution estimated the global market for real estate crowdfunding surpassed $3.5 billion in 2016,” states a recent Curbed report.
Real estate crowdfunding continues to emerge as an investment class, explains Steve Hovland, Director of Research for HomeUnion®. “We know that crowdfunding has matured based on the number of active institutional investors in the sector. While this vote of confidence provides validation to smaller investors, they still have very few high-quality crowdfunding investment opportunities at their fingertips.”
Real Estate Crowdfunding Defined
What exactly is crowdfunded real estate? Most people associate crowdfunding with sites like Kickstarter or GoFundMe. These are community donation websites used to solicit online payment for a new business venture, or expensive medical bills, for instance.
“Crowdfunding for real estate functions similarly, but instead of donating your money and never seeing it again, an investor actually acquires a hard asset that produces monthly returns,” explains Jaime Sipila, Senior Product Manager for HomeUnion®. Crowdfunding enables real estate investors to purchase small stakes in residential (or commercial) real estate projects. “In essence, crowdfunding allows you to invest in ‘pieces’ of many houses and/or ‘pieces’ of several apartments,” Sipila continues.
With crowdfunding, an investor doesn’t own real estate directly under their name or receive a title to the land. Instead, the investor owns an indirect interest in the real estate. Crowdfunding is structured so that an investor possesses interest in a limited liability company (LLC) that owns real estate.
What About Risks and Returns?
Crowdfunding has leveled the playing field for many people who may not have enough money to purchase an investment home outright. Because of its lower entry costs and shorter hold times, real estate crowdfunding has become more accessible to a larger portion of the population. Plus, the sector’s use of technology has attracted younger investors. “The appeal broadens even further when transactions can close online or on a native app,” remarks Sipila.
Most crowdfunding companies require a minimum initial investment of $5,000, which means your returns could be as low as $20 a month. “Naturally, the more money you invest, the higher your returns,” says Sipila. According to MarketWatch, an average real estate project raises between $50,000 and $3 million from retail investors. For a $10,000 investment, returns can range from $700 to $1,200 for a one-year debt investment to $5,000 to $15,000 for a longer-term (three to five years) equity investment.
Funds established by crowdfunding companies have a shorter life span – between five and seven years – and are liquidated in the final year. Meanwhile, investors in wholly-owned SFRs hold their houses for a longer term, typically for 10, 15 or 30 years. “As a result, returns for a crowdfunded project won’t compound like they do after year 10 of owning a rental home outright,” explains Hovland.
As the Sector Evolves, More Niche Options Become Available
Heading into 2018, companies offer specific types of real estate to their funds for investors. For example, a crowdfunding firm may create a fund of rental assets that are located in high-quality neighborhoods (B or above) in geographic locations with a heavy concentration of tech jobs and strong rental demand, such as Austin and Charlotte.
Other funds may consist of high-yielding or “fix-and-flip” investment homes, located in markets with low median prices. These types of funds are similar to the mutual funds acquired through an online stock brokerage firm. In general, these funds can be separated into pools of real estate assets that will create longer-term appreciation for investors; more balanced growth’ or high-yielding, shorter-term wealth.
An investor typically selects funds based on their age, income level and savings accumulated. For example, a millennial in their mid-20s or early 30s has a lot of time to accrue capital, and therefore can assume higher risk than a retiree. Investing in a high-yielding fix-and-flip real estate fund could be the right choice for that millennial. On the other hand, a baby boomer might be better served to acquire stakes in a fund with lower risk, such as a high-tech fund focused on appreciation.
No matter what your preference is, crowdfunded projects or whole ownership of assets, we can help. Contact a Solutions Specialist today to get started on a profitable path!