Could crowdfunding be the new frontier for real estate investing? Crowdfunding is an emerging industry alternative to property investment trusts for modern investors looking to gain exposure to real estate.
Crowdfunding is a growing phenomenon, based off of collecting funds from groups of individual investors to make a great variety of projects a reality with the funds raised.
However, despite this promise of capital appreciation, there are still significant challenges for this budding industry to overcome before it can reach its full potential as an investment space. Below, we examine some of these challenges and opportunities that crowdfunding will face in 2020.
Challenge: Lack of Track Record
Generally, should a crowdfunding platform suddenly close down, investors would want some measure of investment protection or surety. Nobody likes to lose access to their hard-earned capital, especially in an unexpected manner. This is a complicated challenge, but not one without a solution. Crowdfunders should have a solid balance sheet, and appoint a receiver or a trust that would take over in cases of insolvency.
Challenge: Industry Standards
There is also the issue of how these real estate projects are valued by crowdfunding platforms, based on which criteria, without clear industry standards put into place. Valuing real estate is arguably one of the most important factors in the success of such investments and will dictate potential performance. Without some clarity as to how these properties are selected by crowdfunding platforms, there is the potential that they could have been overvalued, and the returns won’t be as high as expected.
In order to achieve these standards, there is still some work that needs to be done. Things like introducing transparent regulatory frameworks, clear and uniform valuation methodologies and other consistencies in order to allow investors to have a deeper look at these very important vectors of their investment.
Challenge: Little Independent Investment Advice
The majority of investments do not offer guarantees of success, and the same applies to real estate crowdfunding. Therefore, finding reliable investment advice for this fledgeling industry is difficult. In more traditional areas such as stocks, people can visit an investment advisor or wealth manager for recommendations and ideas, or check out places like Morningstar to get performance ratings and other investment management services.
At present, no such advisory services are available to crowdfunding investors, which is an important challenge the industry will have to overcome. Without such guidelines from more-experienced professionals, newer investors may be too intimidated to make more significantly-sized investments because they don’t know how to maximize their returns or select the projects with the highest potential to perform well. In such a new field of investing, it’s safe to bet that many investors will be hesitant to participate without clear guidelines in the form of precedents set by others, and it may be a while before crowdfunding is familiar enough to have them.
The crowdfunding industry still has some significant challenges to overcome in its journey towards becoming a fully established investment alternative to the options already available in the real estate market right now.
About the Author:
Kirill Bensonoff is an immigrant, investor and a serial tech entrepreneur with multiple exits. He is an expert in enterprise IT, blockchain and fintech. Bensonoff currently serves as Chief Product Officer of New Silver, a fintech non-bank loan originator.
As a graduate of the EO Entrepreneurial Masters at MIT, he has served as both an advisor and angel investor to over 30 different companies. As a mentor at the MIT Enterprise Forum, Kirill has helped startups with scaling, product market fit and growth strategies. Kirill invests personally and via the Chain Reaction Boston group, as well as with the Blockchain+AI syndicate on Angel.co.