A Chinese adage says to view problems as opportunities. Problems happen because fundamental changes are needed.
There are shifts from old to new paradigms, making the previous structure obsolete. This is true in many areas including the business realm.
The fundamental change does not cushion big players. In fact, most of the time their excesses or abuses are the very triggers to this tectonic shift. Technological advancement paves the way to make the shift faster and more fluid.
Take the case of the real estate problem in the USA. The real estate crunch caused the downfall of many big names in the U.S. capital and banking industry, but it does not mean the collapse of the whole system. It just signifies that we need to, as Milind Lele said in his book Creating Strategic Leverage, “change the rules of the game – even change the game itself.”
How real estate crowdfunding is changing the rules
In the old structure, individuals invest in real estate companies, often without knowing where future projects will be. In the new investment model called real estate crowdfunding, investors can choose a project to put their money without necessarily buying equity into a specific company. In this sense, investment decisions are project-based.
Crowdfunding vs traditional financing
A. For Real Estate Companies
B. For Investors
Benefit to Investors
In the traditional system, an investor may either buy stocks or bonds of a property company. Investors can expect returns by way of periodic interest from bonds or an increase in market prices and dividends of stock. Through real estate crowdfunding, an owner can offer returns on a project. In effect, it operates as a joint venture with a wide base of investors. Then, the investors can choose which project is more attractive to him or her based on a specific criteria.
Investors have preference on which project to invest, rather than which company to invest. The investment decision, therefore, will not be company-driven but project-driven. Under this structure, a real estate company cannot sell itself except on the merit of its existing projects and track record in managing a default rate.
Compared to investing in one real estate company, investing in real estate projects via crowdfunding minimizes the risk for investors. They can spread the risk by distributing funds in several projects of several companies, rather than putting all their eggs in one basket. If one project or one company fails, other companies may fill in the gap.
Crowdfunding platforms/Firms for real estate projects
Here are five revenue-generating realty-focused crowdfunding platforms/firms that have presented at our realty-focused events in the past:
The future of real estate crowdfunding
This new peer-to-peer game in real estate investment is an irreversible trend that is rocking the traditional banking and investment players. With the rules and restrictions that banks and investment houses must adhere to, they will encounter difficulty in matching the flexibility of crowdfunding in terms of the amount of placement, choice of timeline and returns, and speed in transaction processing.
The success in real estate crowdfunding could escalate to other industries. This will open windows for easier access to funds for breakthrough projects, particularly technology-driven discoveries or innovations that cause creative and irreversible disruption of obsolete and inefficient industry systems and processes.
In the meantime, here are the other 15 players in this emerging industry: