Each real estate crowdfunding platform has its own features and structure, but the process behind each model is usually the same.
The platform identifies potential investment properties and conducts due diligence to assess the credentials and potential risks of each individual property. Due diligence will include:
* national and local property market analysis
* studying socio-demographic trends to ensure the property is suitable for local demand
* the yield potential of the property
* rental and sales performance analysis, including comparable local properties
* site visit to assess the condition of the property and renovation requirements
* verification of the property’s legal status
The decision on whether to invest in a property will be made by the platform’s Investment Committee. The property may then either be forward-purchased using the platform’s own funds (recuperated from subsequent crowdfunding), or launched on the platform to raise purchase funds.
When a property is launched on the crowdfunding platform it is not yet ‘owned’ by investors. Instead, individual investors commit funds until the target sum is reached. At this point the property is bought either directly or from the platform if the property has been forward-purchased.
The property is bought by or (transferred into) a Special Purpose Vehicle (SPV) – a subsidiary company created specifically for that individual property. The SPV has a legal status as a separate company, which reduces risk for the investor as it ring-fences their funds from those of the parent company; should something happen to the real estate crowdfunding platform, the SPV and its invested funds remain unaffected. The money each investor contributes is essentially buying the proportionate amount of shares in the SPV that buys the property.
In the event insufficient funds are raised from the crowdfunding round in the required amount of time, each individual investor receives back the money they had allocated to the opportunity.
Once funding is completed, the property is purchased, prepared for market and tenanted. An experienced crowdfunding platform will work in conjunction with local agents who have a list of prospective tenants, meaning the property is usually tenanted within one month of purchase.
At the end of the first month’s tenancy rental payments are received by the managing agents and passed onto the crowdfunding platform, who distributes them accordingly amongst all participating investors.
Real estate crowdfunding platforms provide a hands-off investment. The whole property management process from start to finish is handled by appointed agents – sourcing and managing tenants, legal and regulatory requirements, negotiating sales and rental rates, renovations and sales.
If a secondary market is available, investors can offer their shares in the SPV for sale at any time to other members of the crowdfunding platform. Prices may be agreed between buyer and seller, or set according to the current market value of the property. Exiting an investment this way is completely dependent upon there being an active secondary market – whilst many platforms offer the service, it is not uncommon for investors to fail to find buyers, leaving them locked until the property is sold.
Most commonly, the property is put up for sale after a determined period of time. Once the property is sold, each investor receives back their original invested amount plus the corresponding share of any capital gains the property may have generated. Investors can withdraw their funds from the crowdfunding platform or re-allocate them to subsequent opportunities.