The real estate business is a capital intensive one especially in a country like Nigeria where there are no proper mortgage systems and structures that make acquisition of real estate easy or convenient yet. Real estate developers, individuals and organizations have however found a way to survive in this harsh business environment and ensure that the sector doesn’t become decrepit especially since there is a huge need for real estate in the country. One of the ways by which players in the industry have tackled the issue of funding is what is referred to as crowdfunding.
Crowd-funding basically means a group of people (crowd) who come together to fund a project. A crowdfunded project is financed by a large pool of investors who individually contribute a small amount towards the achievement of a goal. Unlike the traditional means of development funding which requires having large lump sums of cash, crowdfunding is a non-traditional, non-bank financing source which involves making use of your diverse networks of friends, family and colleagues. Social media websites such as Twitter, Facebook, Instagram and LinkedIn can also be used to publicize a viable real estate business and attract investors.
Before the idea of crowdfunding, the option available for small-capital investors in real estate is the Real Estate Investment Trust (REIT) which gives investors the opportunity to purchase shares of investment properties managed professionally by the REIT. The investor thus earns a percentage of income made from these investments but does not directly own the property. Another turn off is that sometimes, comparatively high fees can be required to support the REIT’s management.
The idea of crowdfunding in real estate therefore offers both developers and investors great advantages. For the developer, the bureaucracy involved in asking for a loan in a bank and the excessive interests attached to such loans when granted is eliminated since crowdfunding usually takes place on web-based platforms which gives developers opportunity to reach a large number of investors.
To the investor, some advantages of crowdfunding include:
(a) easy and quick access to the real estate market since little amount of money is required for entry
(b) opportunity to work directly with real estate developers and this gives investors greater control over which projects get funded
(c) availability of real estate projects to choose from since there is access to various investment options rather than a specific portfolio that attracts huge management fees and
(d) transparency in the development process since progress reports and dividend payouts are posted on the Internet or to investors as may have being agreed as the project advances.
Like any business model however, there are also disadvantages. The disadvantages for investors include: (a) losing whatever amount has been invested if the market goes south
(b) absence of liquidity since non-availability of a secondary market restrains investors from having easy selling access
(c) possibility of the real estate developer defaulting on investment is higher in comparison to direct real estate investment funding.
Economically, crowdfunding promotes entrepreneurship. This is because young individuals have the opportunity to be investors without requiring so much capital since a low-capital entry is required for crowddfunding. That is not to say one should be quick to indulge in any crowdfunded project available. It is advised that before one gets started with crowdfunding in real estate, proper due diligence should be conducted about the firm(s) involved.
Online and the internet age has brought another dimension to crowdfunding. Crowdfunding now provides investors with the opportunity to select private real estate deals online where they can explore and make sound investment decisions; it is attracting serious interest and has the potential of causing a revolution in the real estate market. Crowdfunding is yet to take full hold in Nigeria as at now as previous efforts by a handful of individuals and groups to start such as not really materialised in creditably sustained outfits. Much of what we have are still a group of investors, handful in most cases and not exceeding 50 at other times come together to fund a real estate project using a Special Purpose Vehicle (SPV). Especially with the special features of Limited Liability Partnership (LLP) type of business registration now possible in Lagos State with a maximum of 20 (unique and distinct) investors. Crowdfunding can only get better as we go on.
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