Crowdfunding: What, Why & How

Real Estate Crowdfunding: Your Childhood Piggy Bank, All Grown Up

Real Estate Crowdfunding, what it is and why do we need it, let’s begin understanding this by first looking at an example.

Remember those epic summer lemonade stands we built as kids? We'd gather spare change, squeeze lemons with all our might, and hope enough people on the block would quench their thirst to turn a profit. But let's be honest, sometimes the sugar budget was a bit tight for a truly epic operation.

Fast forward to adulthood, and that childhood dream of a lemonade empire can be rekindled – with a real estate twist! Real estate crowdfunding lets you pool your resources with others to invest in properties that might otherwise be out of reach. Think of it as a grown-up piggy bank, where everyone contributes a little and shares the rewards.

Just like navigating the sugar-to-water ratio for the perfect lemonade, there are a few details to understand before diving into real estate crowdfunding, especially for first-time investors. So, let's break down what it's all about and how to get started!

You stumble upon an old apartment building in a trendy neighborhood of Mumbai. It's got all the character – exposed brick walls, high ceilings – but the interiors are outdated and lack modern amenities. Your gut tells you this old estate could be a goldmine, but a full renovation is needed.

Here's the challenge: the price tag for the building is Rs. 5 crores, and the renovation costs are estimated at Rs. 2 crores. While you have the vision and expertise to transform the space, financing the whole project on your own is a stretch.

Enter crowdfunding

Instead of a traditional loan, you can turn this project into a crowdfunding opportunity. You break down the investment into smaller portions, allowing a group of individuals to contribute to the renovation. This grants everyone a win-win situation:

• For You (the Developer/Investor): You secure the capital needed to bring your vision to life, without the burden of a hefty loan.

• For Investors: They gain access to a piece of a potentially lucrative property they couldn't afford to purchase outright. Plus, it adds diversification to their portfolio.

This way, everyone involved benefits – you get the capital for the charming building, and investors get a chance to be part of a potentially rewarding project.

So, what is the Process Involved in Real Estate Crowdfunding?
Beyond the crowdfunding platform itself, three crucial entities work together to make the projects a success. These are:

• Sponsors : They essentially are the ones who spot an investment opportunity with promising potential. They craft a plan to acquire the property, find investors through crowdfunding platforms, and oversee the entire project's life cycle, from management to eventual sale.

• The Trustee: The Trustee acts as the project's guardian. Their main job is to ensure everything plays by the rules and adheres to all legal regulations. They act as an impartial party, safeguarding investor interests by guaranteeing proper corporate governance and holding security on behalf of lenders. They also provide valuable guidance and management functions.

• The Manager: Once the project gets underway, the Manager steps in. They're the ones on the ground, handling the day-to-day operations of the property. This includes tasks like overseeing maintenance, managing tenants (if it's a rental property), and ensuring everything runs smoothly according to the guidelines set by a governing body.

By working together seamlessly, these three entities – the Sponsor, the Trustee, and the Manager – make real estate crowdfunding a viable investment option. They provide the vision, the security, and the execution power to transform potential into profit.


How Are the Profits Divided?
So, you've invested in a real estate crowdfunding project. But how exactly do you reap the rewards? Here's the  breakdown:

It eventually all boils down to the investment model you choose.

Option 1: Owning a Piece of the Pie (Equity-Based)

This model grants you direct ownership in the property, allowing you to share in the rental income and potential sale profits. Investors receive returns in two ways:

• Rental Income: Just like a landlord, you'll earn a share of the rent generated by the property. The more rent the property brings in, the bigger your slice of the pie!

• Selling for a Profit: If the property is eventually sold for more than the purchase price, you'll benefit based on your ownership percentage. Think of it as a potential windfall!

Option 2: Steady Interest Payments (Debt/Lending-Based)

Here, you act more like a lender than a property owner. Investors "loan" money to the project, and in return, receive a fixed interest rate on their investment. This option offers predictable returns, similar to a typical loan.

The key takeaway ?
Real estate crowdfunding provides flexibility in how you share in the profits. Choose the model that best suits your investment goals, whether it's steady income or a potential windfall.