Real Estate Crowdfunding in India – The Essential Guide for You
Real Estate Crowdfunding existed in previous decades with only high net worth individuals and institutions gaining access to finance institutional real estate projects.
Most countries regulated the crowdfunding setup and didn’t permit small scale investors to crowdfund high-end real estate projects. However, as the progress in technology and the advent of the internet brought the world closer, innovations in the real estate sector were bound to happen. Modern-day Real estate crowdfunding is one such innovation that brings together common people through an online platform to fund institutional-grade real estate assets.
Real Estate Crowdfunding scenario in India
In India, the concept of real estate crowdfunding has started to become popular due to the success of western firms in the industry. Peer-to-peer crowdfunding is already permitted in India and is regulated by the Reserve Bank of India. Since evolving technologies offer a wide array of connectivity, a person sitting in any corner of India can invest in real estate crowdfunding through their laptops or mobile phones. Thus, taking advantage of the opportunity, many fintech companies have started up to build a robust real estate crowdfunding platform that assists developers in raising finance for big real estate projects. The crowdfunding platforms are designed for ease of access, transparency in transactions and detailed tracking of returns. Moreover, SEBI is keen on regulating the whole real estate crowdfunding space that attaches an equity-based return on the investment. For that, constructive steps have been taken by SEBI with putting up a consultation paper to study the risks and rewards and the regulatory frameworks of other jurisdictions. In a few years, it is expected that the real estate crowdfunding scenario will be more organised and regulated in India like other financial securities.
Basics of Real Estate Crowdfunding
Real Estate Crowdfunding set up is optimized to raise funds and finance real estate projects. In this, a developer who needs capital for his upcoming property project, seeks a crowdfunding platform to pool in investments from common investors. The platform then lists down the details on their website along with the due diligence report of the developer and his historical credit background. With this, investors worldwide can invest in the project to raise funds which act as debt financing for the project. The developer then invests the collected funds in the daily operations of the project. The developer gives a fixed percentage of interest to the investors on their share of investments regularly.
Difference between Traditional real estate investing v/s. Real estate crowdfunding
- A traditional real estate investment includes the direct acquisition of real estate property through in-person interaction between the buyer and the seller. However, in real estate crowdfunding, there is no involvement in the transfer of actual property to the investors. Real estate crowdfunding only enables investors to finance a real estate project in its development stage.
- Traditional real estate investing offers a certain level of liquidity in terms of buying and selling the property. However, in real estate crowdfunding, there is no exit until the end of tenure and thus impacting the liquidity.
- Traditional real estate properties require high maintenance and payment of regular property taxes and so on. Real estate crowdfunding provides the benefit of no maintenance of actual property but still getting the taste of investing in real estate.
- Traditional real estate investments allow less scope for diversification. However, real estate crowdfunding allows a high scope for diversification of funds amongst the real estate projects to mitigate the risk.
Risk and Returns Overview of Real Estate Crowdfunding
Real Estate Crowdfunding offers an indirect way of investing in real estate as a financier for real estate projects. On average in India, peer-to-peer real estate crowdfunding provides a return of 12% per annum. However, some high-end projects may also offer up to 20% annual returns. The maximization of returns depends on the quality of the project and expected demand for it in the future. Though the process is simpler through an online crowdfunding setup, there exists a certain risk attached to it. However, understanding these risks is important to tackle and prevent unforeseen events.
- Risk of Default – The risk of default exists on the behalf of the developer to whom the funds are lent due to the absence of any collateral security. The uncertain life-cycle of real estate can cause a financial crunch to the developer and there might be chances of him defaulting on the interest payments. In such cases, it is of utmost importance to undertake complete due diligence in checking the background of the developer before investing. Furthermore, it is beneficial to choose a trusted crowdfunding platform that puts the interest of the investors first.
- Risk of Fraud – It is possible that some investors may fall prey to fraud crowdfunding platforms that are not authorised under the Companies Act, 2013. Thus, it is necessary to check the background of the crowdfunding platform too.
- Risk of Non-completion of the project – There exists a risk that the developer may not be able to complete the real estate project within the stipulated time or may even stall the project forever. However, this risk can be avoided by investing in only RERA certified projects which holds the developer liable for non-completion of the project within the RERA’s stipulated time frame.
Small-scale investors benefit from real estate crowdfunding
A majority of investors in the low and medium-income classes are sceptical about the safety and surety of their funds invested. Furthermore, the absence of huge capital forces them to stay away from the exceptional returns of the real estate sector. Thus, they lose out on profitable investment opportunities and the fear of loss doesn’t let them take full advantage of the potential growth opportunities. However, with increased knowledge on suitable investing options under real estate crowdfunding and optimizing returns through mitigation of risk, investors can enjoy the benefits of earning passive income with small-scale real estate crowdfunding investments.
Understanding the dynamics behind Real estate crowdfunding can help investors in low- and medium-income segments to make superb returns in the long term. Here are the ways how small-scale investors benefit through real estate through crowdfunding.
- Allows Investing in small amounts
Since, people in low- and medium-income segments cannot risk any money, they can take the benefit of investing small amounts in real estate crowdfunding projects. One doesn’t need to have a big block of funds to avail the consistent returns in real estate crowdfunding. This will ensure that only a small amount is blocked in the project which will be repaid after the completion of the project.
- Enjoy a stream of passive cash flows
The developer of the projects pays a fixed percentage of interest on the funds invested by the investors. This interest is paid at regular intervals. Thus, a stream of consistent passive cash flows will be created that can cater to other important needs of the investors in the low- and medium-income section. Furthermore, the security of additional income also entails these interest incomes.
- Lower risk through a trusted partner
The major concern of small-scale investors is the safety of their money. Each penny has a worth and cannot be wasted. Thus, to ensure the safety of investment in real estate crowdfunding, one needs to partner with a trusted crowdfunding platform that has the expertise and a well-designed system putting the interests of the investors first. Furthermore, as the regulations from SEBI will come into force in the future, the whole process of real estate crowdfunding will be thoroughly regulated, thus, eliminating the risk of non-payment.
- Plan for future goals
Real Estate Crowdfunding provides a phenomenal way of planning for future goals. Since other investment avenues like Mutual Funds and Stock Market are riskier, planning for long-term goals like Child’s Higher Education or Marriage, Retirement Fund, etc. can be done safely through real estate crowdfunding. With a well-thought time frame in mind, one can keep aside a corpus and can invest the same in high rated real estate crowdfunding projects. Thus, over the years, the corpus can earn an average return of 12% p.a. and accumulate a much larger fund at the time of project maturity. Small scale investors can employ this systematic method to achieve their future goals.
Thus, with optimized investing through real estate crowdfunding, people in low- and medium-income segments can use it as an important tool towards financial independence. Real Estate Investment provides small-scale investors access towards real estate investing indirectly.
Real Estate Crowdfunding is the future of the real estate sector with investors keen on taking part in real estate investments through small-scale funding. All those, who cannot invest a huge capital at once, can diversify their small investments in different crowdfunding real estate projects. Investors are advised to get their goals of investments right, which can help in deciding the best type of investment for them. Real estate crowdfunding is an ideal investment type for low- and medium-income segment investors if they follow a consistent approach in their investing methods through a trusted crowdfunding platform and putting small amounts to cut the risk. Assetmonk is India’s best crowdfunding platform providing tailored investment opportunities through Growth, Growth Plus, and Yield Models with an expected IRR of 21% p.a.
Real Estate Crowdfunding in India FAQ's:
Yes, real estate crowdfunding is allowed in India only through certain forms like Reward Crowdfunding, Peer-to-Peer Crowdfunding, and Donation Crowdfunding.
Yes, property crowdfunding is a unique way of raising funds to develop best-in-class property projects. Moreover, it offers investors to make exceptional passive income over the long term.
Yes, with increased vaccination in India and lucrative prices for real estate, it is the best time to invest in real estate in India. Along with that, assistance from the Government and RBI has lowered interest rates and increased deduction on tax. Thus, 2021 is the best time for real estate investment.
Yes, real estate crowdfunding is safe but only through preferred modes like Reward Crowdfunding, Peer to Peer Crowdfunding, and Donation Crowdfunding in India. Also, a trusted and registered crowdfunding platform is a must for a safer experience in crowdfunding.