Dabbling in real-estate crowdfunding

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Real-estate is a hot commodity in Canada. People have a real fear of missing out -FOMO-. Many believe it’s the way to get rich -quick-ish- in Canada. As a result, prices have gone bonkers in a number of cities, including smaller ones. Of course, if you live in Vancouver or Toronto, this is nothing new.

For most people, buying a piece of property is just unaffordable nowadays.

Now there is a another option to buying REIT shares that let you actually invest in a property or a block of land: real-estate crowdfunding.

In this post, I’ll explain what crowdfunding is, the differences with REITs and give you a couple of options to crowdfund.

What is real-estate crowdfunding?

In its simplest sense, real estate crowdfunding refers to a group of individuals pooling together their money in order to make a real estate investment. Crowdfunding is not reserved to real-estate and has been around for decades, if not centuries.

However, crowdfunding applied to real-estate is relatively new, particularly for individuals. Previously, only accredited investors could do it, e.g. banks; not anymore. Anyone can now become a real-estate investor with as little as $1!

There are 2 types of investments: equity or loan. Either you own a share of a building or block of land and receive capital gains when it’s sold/or collect rent; or you help securing a loan and receive interest payments. Crowdfunding is a passive investment for investors.

There is a number of companies that you can set-up an account at. In Canada, there are Addy and FrontFunddr. FrontFunddr also offers other types of crowdfunding. I am set-up with Addy and found the process easy and straightforward.

What to look for when investing?

You need to look at a number of matters such as:

  • Internal rate of return (IRR) and. project risk: Real-estate crowdfunding is actually riskier than the stock market. Different projects will have different risk levels. The IRR is the expected annual growth the investment is expected to generate. There is a formula to calculate it, it’s not random! The higher the IRR, the riskier the project.
  • Time horizon of the project: real-estate developments usually take years to complete.
  • General Partner (GP) fees: these are the equivalent of MER for mutual funds. The fees are usually disclosed in the memorandum of offer. Please read this document carefully! Like the MER, the GP fees impact your returns.
  • Minimum investment required: although you can invest $ 1, this amount isn’t going to generate significant returns.
  • The management team, their experience and credentials. Crowdfunding offers very little protection to investors.

What’s the difference with investing in a REIT?

There are a few key differences between Real-Estate Investment Trusts -REITs- and crowdfunding.

  • A REIT trades on the stock-exchange; crowdfunding doesn’t.
  • Because of the above point, REITs are subject to more regulations and reporting requirements; crowdfunding is largely unregulated.
  • You can buy/sell your REIT shares at anytime; crowdfunding has closing dates, and after buying your money will not be available until the project is complete/ the property is sold.
  • REITs are eligible for registered accounts such as TFSA and RRSP. Real-estate crowdfunding is not.
  • REITs are actually better left in a registered account, from a taxation point of view. You’ll pretty much eliminate taxes. Crowdfunding activities are fully taxable. You’ll receive a T5.
  • With REITs, you don’t know much about the properties in the portfolio. You do with real-estate crowdfunding.

Conclusion

Real-estate crowdfunding is becoming more and more appealing for many Canadians. Just like any other type of investments, it carries inherent risks. You need to do your research and due diligence before jumping-in.

For me, it’s a good way of further diversifying my portfolio. However, I don’t plan on investing a lot of money in real-estate crowdfunding.

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