Real estate investment can be made in various ways, including purchasing investment properties or purchasing shares of REITs. A fairly novel concept is participating in a crowdfunded investment opportunity. Real estate crowdfunding is becoming increasingly popular due to its excellent returns. However, since it is still in its infancy stage, investors must first do due diligence and understand the concept behind this new investment scheme.
Thankfully, Matt Frankel gave a concise introduction to real estate crowdfunding through The Motley Fool’s podcast. Here are a few takeaways from the interview:
Real Estate Crowdfunding is a Single Asset
Frankel shared that real estate crowdfunding has tons of similarities with REITs, except that the former is only a single asset. Often, hotels. He said, “Let’s say that they can acquire the hotel for $10 million. A bank might be willing to fund, say, $7 million of that. If this developer, which is known as the sponsor in this, would not want $3 million of their capital tied up, they can approach investors to raise the money from individuals. They usually put up a little bit themselves.” He added, “They can use investors to raise the rest of that money in exchange for a share of the profits.” Compared with REITs, investors do not have to buy one hotel and put all their assets there. They can have one single asset in a property.
It has a Planned Exit Strategy
The great thing about real estate crowdfunding is the presence of a planned exit strategy. Investors never have to worry about holding on a property when it is no longer profitable for them. The property will undergo significant renovations, and developers will try to sell in about five to seven years.
It is Great for Portfolio Diversification
Since investors have to put a little money, they can efficiently diversify their assets. This investment method allows them to buy shares in several hotels, and enjoy profitable returns for each investment they make. Frankel said that investors could benefit from this type of property investment because buyers can have the freedom to buy one asset, add value to it, and quickly turn it into profit – a deal that used to be inaccessible to individual investors for the longest time.
It has Excellent Returns
While real estate crowdfunding is still juvenile, it is showing significant progress in terms of returns. In fact, Frankel compared its return potential to general stocks. He said that most of the deals under this investment scheme have targeted returns between 15% to 25% range.
“There’s money to be made here. That 20% rate of return would double your money in roughly four years,” Frankel added.
It is a Riskier Asset
Like stocks, the higher the returns, the riskier the investment. It is impossible to think of an investment with high yields that do not have risks. Frankel explained that when you try to create and add valuation to an asset, you always have to think about execution risk. For instance, you are trying to renovate a property to sell it at a higher value. You have to prepare for things that could potentially go wrong compared with buying a property then straight out renting them out.
The issue of liquidity is something investors have to think about. When they invest in real estate crowdfunding, their money is tied to the property until the whole property gets sold. Frankel warned that real estate crowdfunding investments, unlike REITs, do not have secondary markets. While there is interest in crowdfunding platforms, investors must prepare to lock in their investments.
The trick here is finding a real estate investment that has the potential to provide guaranteed dividends.
Raughton Manor Care Homes Crowdfunding
One of the real estate crowdfunding that has high returns and gives investors guaranteed dividends is the Raughton Manor Care Home located in the UK. The crowdfunding uses a special vehicle, the CrowdHub Group, through which investors can own a long-term lease of the Raughton Manor Care Home in Low Hesket in the UK. Investors can expect to gain 8% to 10% guaranteed dividends. Since the CrowdHub is based in Singapore, investors do not have to pay capital gains tax, which can put their returns to as much as 30% upon the sale of the investment.
Why Invest in the UK Care Homes Industry?
Investors have much to gain when they put their money in the UK care homes real estate market because the UK’s ageing population is increasing. People aged 85 and over will soon total to about 2.2 million. In the next 17 years, there will be about 48.7% of individuals aged 65+. Additionally, the number of individuals aged 85 and up will reach 2.2 million. By 2026, about 14,000 elderly individuals will add to the current population, and the current number of beds in the UK care home will not be enough to compensate for the demand. By the following year, the population of 65+ is projected to increase by 20.7%. It can increase by 24% by 2037.
Investing in real estate crowdfunding has real value. It all boils down to the choice of property you’re willing to capitalise on. Investors must know how they can effectively diversify their portfolio without sacrificing the overall quality of their investments.