Challenges facing a Real Estate Crowdfunding platform, Part 2

One other thing that we missed in the last article was a crucial piece. When Australians start investing in property, leverage is a key factor in the path to creating a Real Estate Empire. Most people start with a home, then after paying down the mortgage for a few years and once sufficient Equity has been accumulated they draw down a portion of it by taking a loan against it and then invest in putting a deposit against the next property. Most banks think property is a safe asset and are willing to loan upto 80-90% of its value.

The big idea of Fractional Property investment and even Real Estate Investment Trusts looses out of steam because it is a financial investment and most banks dont view it the same as owning a house. Which means that leverage is out of the picture. With the option of drawing down equity out of the window the premise of potentially negative cash flows and very low rental returns suddenly seem like a dead duck in the water.

Which is why we at www.estatebaron.comwe also allow the option to invest in Development projects themselves. There are essentially two ways to invest in a Development project. One is Debt and the other Equity.

Most Development projects get a large portion of their project funded by banks and the remainder is funded by private money or second mortgage capital. If a crowdfunding site provides funding in place of a second mortgage then the returns after the platforms fees are going to be 6% to 12% per annum. This is a decent return for retail investors but second mortgage has little security. An early stage crowdfunding platform may not always have the capability to litigate for rights for years in case a project goes bust.

So if you are going to take a risk, why not get the commensurate returns for it in the form of an Equity position where you get rights to share in profits. However the risk is that profits are what is left from revenues after expenses. You can always have a shady Developer/Builder claim thousand dollar door knobs and leave nothing in profits to be shared. It will take only one bad actor to destroy the credibility of the platform.

In addition most Developers want certainty in funding. They put deposit and then they want to know that they will receive funding else its their neck on the line come settlement. While in the US projects get filled in hours, the depth of market in Australia or awareness of the concept is minimal. Guaranteeing funding is not possible in the early days of a crowdfunding platform.

So what is the solution to all of this? Well, we will finally have an answer in the next article!