Equity Or Debt Real Estate Crowdfunding? An Investment Allocation Guide
Crowdfunding is an industry in rapid growth all over the world,with great potential for both investors and individuals or businesses looking for funding.
In simple terms, crowdfunding is a way of raising funds from the public for either a business, an individual, a project, or a campaign.
Returns are realized, in the form of a share of the rental income the property generates, less any service fees paid to the crowdfunding platform.
Investors may also pay out are shared of any appreciation value if the property sells.
One perk of owning an investment property can deduct certain expenses associated with its ownership, such as depreciation and the cost of repairs. That means investors can reap the benefits of the depreciation deduction without having to own property directly.
Equity crowdfunding can put more money in investors’ pockets. But it means taking a bigger gamble. Investors are second in line when it comes to receiving a payback on their investment.
Debt-based crowdfunding distinguish by investors providing funds in exchange for the right to have their money paid back with interest according to the repayment terms specified in a loan contract or debt security.
Thus, debt-based crowdfunding accounts for a total of 99.6% of the worldwide funds raised through crowdfunding.
Stable cashflow & returns: It is easier to predict compared to crowd equity.
Less risk: Instead of buying a piece of a company, lending money usually involves less risk, and give a loan with a crowd opens up for greater diversification.
Short investment duration: The duration of loans is specified clearly, so you know how long the investment will run if the loan finance on time.
Returns are restricted: You know truly what interest rate you are going to get paid if the loan pays back in full. In case a borrower misses payments, late fees can increase the return a little bit.
High maintenance: The administration of borrowers and transactions requires ongoing maintenance, which might result in more fees. Shorter investment durations mean that the monthly repayments needed you actively reinvest the money.
Taxation right away:
When lending money to someone and, you will usually start receiving returns monthly instantly. It also means you are going to be taxed right away, compared to postponing it until the total return of the investment realize.
What Investors OwnReal estate crowdfunding platforms can vary widely in terms of how investments are structured and, that affects what an investor owns.
RealtyShares, for example, creates a separated limited liability company (LLC) for each equity investment opportunity.
The LLC holds an interest in the entity that owns the real estate at the center of the investment. Investors own shares in the LLC, giving them limited liability as well as definite tax benefits associated with pass-through entities.
Benefits for Investors
DiversificationBetween debt and equity investments in both commercial and residential properties and real estate funds, investors have the opportunity to gain exposure to a new asset class.
Tax benefitsReal estate crowdfunding allows investors to benefit from certain tax breaks, such as depreciation, that apply to owning an investment property.
How to Raise Capital Through CrowdfundingRaising capital ?
For a real estate project is much easier when investors choose an established, experienced platform like RealtyShares to facilitate the crowdfunding process.
Here’s what that typically entails:Pick a PlatformThe most popular and leading platforms are RealtyShares, RealtyMogul, iFunding, Patch of Land.
Submit an ApplicationBy providing the platform with information about the real estate opportunity via an online application form, they can review the opportunity and quickly begin the process.
Once approved, additional information will request about the project and, a background and credit check will run on the principals of the sponsoring real estate company.
For equity projects, any draft offering memorandum that may be available also will request and, for debt financings, the renovation plan and budget will solicit.
Next, the opportunity is presented to the platform’s accredited investors to gain attention and capital for the project.
Raise CapitalWhile each investment opportunity is unique, the time it takes to complete funding for an investment opportunity is difficult to predict.
Debt investments can sometimes fund quite quickly,often within 24 hours, while equity investments involving hold for extended periods typically take somewhat longer to funds and, repeatedly few weeks.