The Future of Real Estate Crowdfunding and Syndication
By Michelle Clardie on 01/25/2024.
Reviewed by Josefin Gatsby
Real estate crowdfunding and syndication are becoming more mainstream as investors all over the world learn more about the benefits offered by these innovative investment options. Polaris Market Research recently conducted a detailed analysis of this growing sector to determine where it’s headed. These researchers wanted to understand the future of real estate crowding and syndication. Some of their findings are exactly what the average investor would expect, others might surprise you!
In this article, we’re going to look at the data from the Polaris Real Estate Crowdfunding Industry Analysis, share their key predictions, and explain what this information means for you as a real estate investor.
But first, we should quickly explain the basics of real estate crowdfunding and syndication for anyone who’s not yet familiar with these relatively new investment models.
Introduction to Real Estate Crowdfunding and Syndication
Real estate crowdfunding and real estate syndication are very similar investment models. In both models, multiple investors pool their money to fund a specific real estate project. The project could be a single-family house flip, a commercial high-rise development, or anything in between.
The project is managed by a real estate sponsor, who collects the investment capital, arranges any additional financing needed, acquires the property, oversees the renovation or construction, and distributes proceeds back to investors.
Crowdfunding and syndication provide impressive benefits to investors, including:
Low investment minimums. Pooling funds from multiple investors allows each investor to contribute much smaller amounts than would be necessary for any individual investor to fund the project alone.
Access to interesting deals. This multiple-investor arrangement allows investors to get in on deals that would otherwise be cost-prohibitive.
Diversification. Crowdfunding and syndication allow you to add real estate to your investment portfolio, even if you’re not interested in direct property ownership. This provides some diversity to a portfolio primarily comprised of stocks and bonds.
Flexible opportunities. Because crowdfunding and syndication can be used across property types, you can focus on opportunities that work with your unique goals. For example, if you’re looking for short-term investments that will provide a quick return of your principal amount, you could invest in a small multi-family development. And if you’re looking for a long-term deal with cash flow potential, you could choose to invest in a built-to-rent property.
High-yield potential. A good crowdfunding/syndication sponsor is always actively seeking new properties with strong return potential. With a good sponsor, investors may outperform the market.
Passive investing. Real estate crowdfunding and syndication require far less from investors than traditional property ownership. You won’t have to be actively involved in the acquisition, construction, rental, or sale of the property; your sponsor will handle every detail for you.
Online investing. Crowdfunding and syndication use online platforms to streamline the investment process. Most sponsors also use the online platform to provide regular status updates on the project.
The primary difference between crowdfunding and syndication is the ownership structure. With syndication, all investors join the sponsor as members in a newly formed legal entity (typically a trust or LLC), which owns the property. This gives investors a legal ownership stake in the underlying real estate. In crowdfunding, the ownership arrangement is not so clearly defined; investors might be acting in more of a lender role than an owner role.
The Future of Real Estate Crowdfunding and Syndication
Now that we have a solid foundational understanding of crowdfunding and syndication, we can look ahead to the future of the sector. Here are five expert predictions for the future of crowdfunding and syndication.
Prediction #1: Exponential Growth for This Investment Model
In 2023, Polaris calculated that the value of the global real estate crowdfunding market as of 2022 was $14,294.9 million. This is already a substantial figure, but more impressively, Polaris projects a compound annual growth rate (CAGR) of 50.9% through 2032.
Prediction #2: Higher Compound Annual Growth Rate for Individuals
While institutional investors (like banks and insurance agencies) currently hold the highest revenue share in the crowdfunding market, individual investors are expected to show the greatest growth over the next decade.
The reason behind this prediction is the accessibility of crowdfunding to individual investors. The JOBS Act of 2012made it possible for investment companies to promote their offerings to the general public. This paved the way for innovative investment companies, like Gatsby Investment, to create online platforms that make it easy for investors to choose from a range of opportunities and track the progress of the project through a user-friendly dashboard.
Prediction #3: Increased Popularity of Equity-Based Investments
Crowdfunded investments are either debt-based or equity-based. In debt-based investments, the investor acts as a lender, loaning money to the project for a set rate of return. In equity-based investments, the investor acts as an owner, entitled to a share of the project’s net income.
While debt-based investing is lower risk, it also provides lower return potential. Because equity-based investing gives investors a chance to share in the profits (whether it be rental income or proceeds from the sale), it can provide much higher returns than debt investing. This makes equity investments highly desirable by investors who are willing to take a bit more risk for higher reward potential.
Prediction #4: Residential Market Domination
It’s no secret that the commercial real estate market has struggled in recent years. First, a strong portion of the retail segment moved online, leaving storefronts vacant. Then the work-from-home revolution left empty office spaces across the country. Of course, people still need a place to live. And, if they’re working from home, they might be a bit more selective, willing to spend more money to make sure their home comfortably accommodates workspaces as well as living spaces.
Additionally, desirable areas are experiencing extremely low levels of housing inventory. As we saw in our analysis of the Southern California housing shortage, there are several reasons for the housing shortage, including the lack of new construction since the Great Recession, geographic barriers, and retirees opting to age in place instead of downsizing. The good news is that this has led to immense opportunities for developing new housing.
Prediction #5: The North American Market to See Highest CAGRs
From 2019 through 2022, the Asian real estate markets saw the highest CAGRs from crowdfunding and syndication. However, this is expected to change as American investors become more aware of this investment option. Polaris research indicates that CAGRs in the US and Canada will outpace the Asian markets over the next decade or so.
Monitor the progress of your project(s) and receive your share of the income!
Join the 14,000 members who have earned an annualized average return of 23% since 2017! Sign up with Gatsby today and be part of the real estate crowdfunding and syndication revolution.
