Understanding real estate crowdfunding: A balanced assessment

In the old days, if you wanted to invest in property, you either had the cash to hand or you borrowed money from traditional banks. It was a long process, with a lot of paperwork, and for the most part it still is.

There are more alternatives today, some more or less risky than others. One of those alternatives is crowdfunding, which allows multiple investors to pool funds for property investments. 

It’s easy to get caught up in either celebrating or running scared from anything new in the world of investing. Crowdfunding is no different, but don’t worry. In this blog, we take a completely neutral view to examine how crowdfunding works in an Australian context, weighing its advantages and disadvantages, to help you determine if it aligns with your financial objectives.

What is Real Estate Crowdfunding?

At its most basic, real estate crowdfunding is when multiple individuals each make a small contribution towards a real estate investment, usually through online platforms. Instead of a single bank contributing $200,000 to a loan, you might instead have 100 investors who contribute $2,000 each, in exchange for either equity or debt.

That might have been impossible to organise before digital platforms made it easier to connect one project with such a high number of backers. But it’s still complex. 

Nevertheless, crowdfunding is getting more popular for both residential and commercial investors, with more and more crowdfunding platforms emerging that are specifically built for real estate.

How Does Real Estate Crowdfunding Work in Australia?

Typically, crowdfunded investments involve a Managed Investment Scheme (MIS) to represent all the investors, which itself needs to be operated by a licensed platform with an Australian Financial Services Licence (AFSL). The MIS needs to be registered with ASIC, with members entitled to documentation outlining risks, fees, and investment structures.

In most cases, investors don’t directly own the property but rather own units in a trust or fund, which itself collectively owns the property. Depending on the platform, investors put in a minimum of anywhere from $500 to $25,000 each. In return, they get a share of the rent and/or the profit.

Who are the Major Players in Australia?
The most prominent platforms in the Australian market, in terms of market share, are:

1. DomaCom: One of the earliest and most established fractional property investment platforms in Australia, operating since 2015 with a significant market presence.
2. VentureCrowd: A major player that expanded from startup equity crowdfunding into real estate, capturing substantial market share.
3. BrickX: Remains a significant player in the fractional property ownership space despite pivoting to newer ventures in recent years.
4. Bricklet: A newer entrant with good traction for their property fragmentation model.
5. Konkrete: A blockchain-based real estate investment platform with a niche but growing share of the market.

It's worth noting that the Australian real estate crowdfunding market is still relatively young compared to America or Europe, so the barriers to entry are still reasonably low. Some platforms are also more specific (commercial vs. residential, development vs. existing properties), so they may be more established with their niche than their market share suggests.

Is Real Estate Crowdfunding a Good Investment?

As always, it depends. Real estate crowdfunding can be a good investment for some, but it has advantages and disadvantages you should consider.

Advantages

• Lower barrier to entry: Traditional real estate investing often requires substantial capital, but crowdfunding platforms allow you to invest with much smaller amounts, sometimes as little as $500-$1,000.
• Portfolio diversification: Crowdfunding allows you to add real estate to your investment mix without buying entire properties.
• Passive income: Many real estate crowdfunding investments provide regular income from rent.
• Access to commercial properties: You can invest in property that would normally be out of reach for individual investors.

Disadvantages

• Illiquidity: Some real estate crowdfunding investments lock up your money for years with limited or no option to sell early.
• Risk: Crowdfunding can be a riskier way to invest than REITs or other real estate investments.
• Less control: You have minimal, to zero, say in property management or investment decisions.
• Platform risk: Crowdfunding platforms themselves are often startups, and therefore potentially unstable vehicles for investment.

In addition to those disadvantages, be aware of these risks:

Financial Risks

• Lack of secondary market: Unlike publicly traded REITs, there's no efficient way to sell your investment if you feel the need to.

Operational Risks

• Developer/operator inexperience: You’re putting a lot of faith in the competence of the developers or property managers managing the project, while you have little control.
• Deal quality concerns: If platforms are struggling to maintain a flow of deals, they might accept lower-quality deals.
• Regulatory uncertainty: Like any new industry, the real estate crowdfunding industry is subject to changing regulations that could make your investment less lucrative.
• Hidden fees: Platforms charge various fees that could reduce your net returns.

Transparency and Due Diligence Challenges

• Limited information: Crowdfunding may not give you the same level of disclosure or information that you’re used to with other investments.
• Difficult to evaluate: Retail investors typically lack the knowledge that you would expect to ensure proper due diligence.
• Project delays: Construction and development projects often face delays that can extend investment timelines and budgets, potentially reducing your returns.
• Concentration risk: If your platform focuses on specific property types or geographical areas, it can increase your exposure to sector-specific risks.

Platform Risks

• Platform failure: If the crowdfunding platform fails, your investment could be at risk or difficult to manage.
• Cybersecurity concerns: Platforms that hold your sensitive financial information could be targets for data breaches.

Tax Complexity

• Complex tax implications: Any real estate investment creates complex tax situations, and crowdfunding could add further complexity, requiring professional advice to navigate.
• Unexpected tax liabilities: You may need to treat some investments as taxable income, even if you’re not yet seeing a return.

Is It Right for You?

Whether real estate crowdfunding is a good investment for you personally depends on your investment goals, timescales, and your tolerance for risk. 

Crowdfunding allows you to diversify and spread your risk to an extent, but you’re often investing with less information and almost always with a lot less control. Depending on whether you or the people in control have a good understanding of the market, it may be more or less risky than investing in more conventional ways.

How to Invest in Crowdfunded Real Estate in Australia

If you do decide to go ahead, the typical process will be something like:

1. Do your research to find reputable platforms with good track records.
2. Compare fee structures and investment minimums to select the right platform for you.
3. Create and verify your account.
4. Review available investment opportunities on the platform.
5. After conducting due diligence on specific projects, start to build a portfolio across multiple investments.
6. By keeping careful records, stay on top of the tax implications and reporting requirements.

Investment Strategy Considerations

Don’t make the mistake of thinking that because crowdfunded investments are smaller that they require any less planning and thought. 

In fact, it’s quite the opposite. Effective real estate crowdfunding requires careful strategic thinking. You need to consider how much of your overall portfolio goes into crowdfunding, the location and type of property you invest in, and how it impacts your overall risk profile.

You’ll also need to account for the period of time in which your capital will be locked up in the asset, potentially limiting your liquidity. Make sure you understand the tax implications before diving in. Finally, always have an exit strategy for every investment. 

Comparing to Alternative Real Estate Investments

To fully evaluate your crowdfunding options, you need to compare with your alternative options:

• Direct property ownership gives you more control, but puts your eggs in fewer baskets. 

• A-REITs offer liquidity, diversification, and steady income, but are subject to market volatility.
• Listed property (A-REITs) offers the most liquidity and flexibility, lower volatility, and long-term capital growth and typically institutional level management.

Ultimately, you need to match your portfolio with your goals. If you need liquidity or certainty, you’ll make different decisions to someone in a position to take more risks or have their capital tied up.

Future Outlook for Real Estate Crowdfunding

What does the future of real estate crowdfunding look like? Technology continues to improve and the speed and functionality of the platforms along with it. At the same time, regulations could get tighter, especially if retail investors make high-profile losses.

The platforms themselves might change too, with new investment models, a more consolidated market, or more secondary markets to buy and sell investments outside of the strict parameters of an investment term. 

Real estate crowdfunding is a growing alternative to property investment, opening up the market to more investors and new ways to balance risk and liquidity. Whether it’s the right investment for you depends on your financial goals, risk tolerance, and ability to navigate the evolving Australian crowdfunding landscape.

FAQs About Real Estate Crowdfunding

What is real estate crowdfunding and how does it work in Australia? 

Real estate crowdfunding in Australia involves multiple investors pooling funds through online platforms to invest in property. Typically, these investments operate through a Managed Investment Scheme (MIS) licensed by ASIC, where investors own units in a trust rather than directly owning the property. Minimum investments range from $500 to $25,000, with returns coming from rental income and/or capital appreciation.

Is real estate crowdfunding a good investment for beginners? 

Real estate crowdfunding can be suitable for beginners due to its lower entry barriers, allowing investments starting from $500-$1,000. However, beginners should be aware of the risks including illiquidity, limited control, and potential platform instability. It's advisable to start with a small amount and diversify across multiple projects after thorough research.

How do I start investing in crowdfunded real estate in Australia? 

To start investing in crowdfunded real estate, research reputable Australian platforms like DomaCom, VentureCrowd, BrickX, or Bricklet. Compare their fee structures and minimum investments, create and verify an account on your chosen platform, carefully review investment opportunities, conduct due diligence, and maintain records for tax purposes.

What are the tax implications of real estate crowdfunding investments? 

Tax implications for crowdfunded real estate can be complex and vary based on the investment structure. Generally, rental income is taxable in the year received, while capital gains are realized upon selling your investment. Some platforms structure investments as trusts, which have pass-through taxation. It's recommended to consult with a tax professional familiar with real estate investments.

How does real estate crowdfunding compare to REITs and direct property ownership? 

Real estate crowdfunding typically offers more targeted investments than REITs, potentially higher returns, but with less liquidity and transparency. Compared to direct property ownership, crowdfunding requires significantly less capital, provides diversification opportunities, but offers less control over the investment. Listed property (A-REITs) generally provides better liquidity and professional management.

What are the biggest risks of real estate crowdfunding? 

The biggest risks include illiquidity (funds may be locked up for years), platform failure (if the crowdfunding platform goes out of business), project delays or failures, lack of control over investment decisions, limited due diligence information, and regulatory uncertainty as the industry evolves.

How long do real estate crowdfunding investments typically last? 

Real estate crowdfunding investments typically have hold periods ranging from 6 months to 7 years, depending on the project type. Development projects may have shorter timeframes (1-3 years), while income-producing properties often have longer investment horizons (3-7 years). Many platforms offer limited or no early exit options, so investors should be prepared to commit their capital for the full term.

Can I invest in real estate crowdfunding through my SMSF? Yes, Self-Managed Super Funds (SMSFs) can invest in real estate crowdfunding, provided the investment complies with the fund's investment strategy and the sole purpose test. However, additional restrictions may apply, and investments must be made on an arm's length basis. SMSF trustees should consult with a financial advisor to ensure compliance with superannuation regulations.