Despite real estate being a commonly understood and relevant asset class, ownership of properties has long been locked with the responsibility of upkeep, maintenance and possibly development of said property. Crowdfunding may present a new paradigm in shared ownership and responsibility for properties in a sharing-oriented or distributed-actor economy.
There are several operating models and functions, but the two major parameters that can be identified are:
- Security type, i.e. equity or debt transactions
- Initial offerings or secondary transaction
Equity and debt models
Equity and debt transactions are both possible, as with the case of early or later phase companies, but both present different ways of structuring the deal for its stakeholders. Debt transactions may be simpler in implementation, as interest can be paid on the actual debt note. In some cases an upside is included with a debt transaction, where a property may be flipped and the profits distributed to the initial funders. In the case that an equity only model is used, a vehicle is often used to facilitate the transaction and profits are paid out upon the realization of the investment. For more information and details on the type of transactions, see our earlier post on structuring real estate crowdfunding.
As in any other model, the underlying goal of the transaction will ultimately determine the appropriate methodology. While there may be many reasons for raising capital, as with any other industry, certain best practices will emerge on the most efficient framework.
Purpose of the fundraise
Despite a nascent (online) market, there are already several spins on the underlying role for crowdfunding to play in the real estate sector. To highlight the diversity of the market, we want to give a few practical applications in this sector.
- Initial raises to acquire a property
- Owner occupied real estate
The most commonly applied model to the real estate sector is undoubtedly to raise capital in a more efficient manner, utilizing either an equity or debt model, to acquire a property with the aim of making a profit on the property. This profit and utility sought from the property can range all the way from renovating and flipping the property and distributing profits, to seeking to rent out the property to generate revenue on the property. While both models have parallels, their utility and characteristics are vastly different and will be applicable to different contexts.
There are several companies pioneering new models where occupancy and ownership of a property can be separated in a manner of (ideally) providing lesser risks associated with ownership of real estate, as well as diversification of a possible increase of value of the property. In practice in this model the person(s) residing in the property may not be the ones owning all or even part of the property. There are several possible auxiliary applications and development to make the housing market more accessible, as well as (one would hope) more secure as well as liquid.
Access to large asset class as well as a local impact angle (e.g. supporting and having a say in what you want developed locally) and efficiency are often at the core of these endeavors. The crowdfunding market is in its infacy and applications will surely build upon realized success. Real estate presents a largely known asset class and many all over the world are looking to add transparency and efficiency to it with modern, online tools.
Internationally awarded entrepreneur, active in pioneering new securities models worldwide at the intersection of the Internet and the securities markets.
Markus serves as the CEO of Crowd Valley Inc, a US-based crowdfunding marketplace platform provider and a spinoff from the Grow VC Group. He is also a global investor and Senior Partner at the Grow VC Group. During his tenure as COO of Grow VC, he recruited over 120 individuals, built up a global team on six continents and expanded operations to over 150 countries. In his earlier businesses, he served in diverse roles, taking on the responsibilities of CFO and increasing sales growth of over 270% per year over several subsequent years. Markus holds an M.S. and a B.A. in Economics.
Markus has pioneered new funding models in the US and Europe, advised policy makers worldwide—including the SEC, the European Commission and Italian regulator CONSOB—for more effective markets, and worked with visionary organizations such as the World Bank and the Kauffman Foundation to improve frameworks for new funding models, including crowdfunding, cross-border investments and private placements. He serves as a frequent public speaker on related themes. He is married and constantly bringing presents from his travels to his two children.