In part one, I introduced real estate crowdfunding and the benefits and risks for investors, developers and renovators. In part two of the series, Jason Cheng of CrowdfundSuite and I break down what investors need to know and introduce some of the Canadian options.
Real estate crowdfunding is a new financing approach where many investors team up to provide the equity or debt required to buy, finance or develop a property or real estate project, typically via an online crowdfunding platform. Part one established that the Canadian market is nascent and three or four years behind the US. A look to the south and to Asia may offer a preview of how this alternative financing method will unfold in the true north.
When you invest in real estate debt, you are lending capital to the property owner or project sponsor. You receive a fixed return based on the interest rate and amount invested and the loan is secured by the property.
On the other hand, when you invest in equity, you are a shareholder in a specific property, special purpose vehicle that owns the property or fund. Depending on the type of property, you may receive a proportionate share of rental income the property generates and/or a share of the value upon sale.
What are the Pros and Cons of Debt Deals?
The pros of debt investments, typical of development projects, include that they often result in shorter hold times of six months to two years, lower risk and regular income typically ranging from eight to 12 per cent annually paid monthly or quarterly.
The cons of debt may include capped returns limited by the loan interest rate and higher fees charged by platforms for loan origination or other platform fees.
The pros may include unlimited ceiling on returns with 15 to 25 per cent not uncommon in the US and, depending on the structure, tax benefits if depreciation or repairs are deductible. Another pro is that fees may be lower in the one to two per cent range of the amount invested, versus upfront fees or service fees that may apply for debt deals.
The cons are the higher risk and lesser liquidity from the longer hold periods, which may last five years or more. Investors are subject to the performance of the project or property and are second in line to any debt instrument holders.
Nexus Crowd is the first portal in Canada to successfully crowdfund Toronto area projects with two successful equity-based commercial development projects closed in 2015 and a third debt-based land deal closing very shortly. They have raised over $1.5 million to date and plan to expand to Western Canada and internationally with a focus on the Lower Mainland in the second half of 2016.
“We provide Canadian investors a unique opportunity to invest alongside institutional developers and investors in large real estate projects,” commented Nexus Crowd CEO Hitesh Rathod. “We expect to see exponential growth in the real estate crowdfunding space as Canadian investors recognize the value of investing in tangible assets with attractive returns.”
Currently projects are only available to accredited investors. Nexus Crowd believes that their partnership model and ability to provide quality investments through a trusted and seamless process will position them well as the space continues to grow.
The second portal entrant, also based in Toronto, is R2Crowd, a strategic partner with JLL, a large global property advisory firm. They expect to have securities licensing in place imminently in multiple provinces and to launch four or five different types of projects every month. R2Crowd appears to be targeting a broader investor base of retail, accredited, institutional and foreign investors while targeting returns of “six per cent to 14 per cent return.”
“There was close to $3 billion in capital raised in the US comprising of both debt and equity deals,” stated Amar Nijar, R2Crowd Founder. “The underlying value of real estate was over $100 billion. We expect 2016 to be a modest year in Canada as everybody is trying to figure out what works and what doesn’t. Online portals such as R2Crowd make a lot of sense for retail investors as they can build a diversified portfolio of different projects to balance out the risk rather than putting all their eggs in one basket.”
A couple of other portals, Open Avenue (Ontario) and MetroFunder (BC) have launched but don’t appear to have any traction in terms of raising investment. With 150-plus real estate crowdfunding portals in the US already, expect the Canadian portal options to grow rapidly in the coming months.
In China, the term “real estate crowdfunding” is a buzzword that developers use to market their projects. Since the formation of the China Real Estate Crowdfunding Alliance in 2015, many Fortune 500 developers in China have started to test the waters. Marketing developments as “real estate crowdfunding,” they understand this appeals to those who lack capital to invest into real estate. Along with the credibility of these developer giants' brand name, deals usually are closed within a day.
After many successful campaigns, more developers in China are dipping their toes into crowdfunding. This has had a ripple effect into the Vancouver real estate industry, where in recent months, Chinese investors have gathered to “crowdfund” the purchase of large developments not using regular approved portals, but rather tools like the app We Chat.
Looking ahead, we will likely see new global real estate crowdfunding portals arise that navigate the complexity of varying securities rules across countries to create new opportunities for you to invest in Canadian or global real estate markets.
Approach crowdfunded real estate like any other investment. Do your homework and diversify your holdings.Look at the merits of the specific property – location, scarcity, amenities, markets and proposed returns.Look at the portal itself – the credentials of the management, any partners, and any track record in successfully financing real estate deals.Consider the sector – is your interest and comfort level in single-family residential fix and flips, new developments of multi-family or mixed-use, or commercial or industrial?Consider the pros and cons and risks of equity vs. debt structures: Can you handle a longer hold period for a higher potential return?