Crowd funding is the most preferred method of funding for startups. It is a method of raising capital through the effort of customers, friends, family and individual investors. This is an approach which taps into the collective efforts of a large pool of individuals through social media and crowd funding platforms. It is also an ideal way to create awareness among the masses for a project. There are various types of crowd funding. It has exploded new ways to raise funds for startups, real estate, inventions, social sector and much more. Different models are being tested by different players in the sector. There are three types of crowd funding in India, donation and reward based model, equity based model and lending model.
The crowd funding industry generated USD 34.4 billion globally in 2015. In India, the transaction value in crowd funding segment amounts to USD 6 million in 2017. It is expected to grow at an annual rate of 24.8 percent resulting in the total amount of USD 16 million in 2021.
According to Bloomberg, India is the second largest internet market with more than 342 million users of mobile and online payment options. In addition, the population of 1.2 billion with an ever increasing middle-class segment is a boon to the power of capital formation for crowd funding.
Crowd funding has covered a range of sectors including social and health. It is now carried over to real estate industry. Crowd funding in real estate took off with hundreds of millions of dollars in 2015. For real estate sector, equity crowd funding is the most used method. It helps individuals become partial owners in properties which allow them to participate in real estate companies to acquire, develop or build. In this sector, the investors tend to invest passively. They do not have to manage the property but are entitled to a share in the profits. The range of fees charged is typically between 0.5-3 percent annually. Professionals- from doctors to lawyers and executives to small business owners invest in the real estate projects. For them, crowd funding offers an opportunity to participate in the ownership of projects that were available to institutional investors only.
It is now common for real estate projects to be funded with a bank loan, funds from a real estate company itself and investments from crowd funded investors and non-crowd funded investors. Real estate uses another type of crowd funding which is a syndicated debt crowd funding. This is a fast growing platform that takes an existing real estate loan secured by a deed on the property and syndicates it out to a network of individual investors at a fixed rate of return. In this case, the debt investors are entitled to repayment before the equity investors can earn a return.
Further, there is a platform also known as pre filled debt crowd funding where investors invest in real estate backed loan and the platform acts as a lender doing their own diligence while issuing a loan to the borrower and removing middleman. These loans are usually for small and compact homes that the borrower is planning to renovate and sell for a quick profit. Platforms charge an annual fee of 0.5-1.5% for this. It can be rightly said that crowd funding in real estate will gain traction in India in the next few years.
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