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One other thing that we missed in the last article was a crucial piece. When Australians start investing in property, leverage is a key factor in the path to creating a Real Estate Empire. Most people start with a home, then after paying down the mortgage for a few years and once sufficient Equity has been accumulated they draw down a portion of it by taking a loan against it and then invest in putting a deposit against the next property. Most banks think property is a safe asset and are willing to loan upto 80-90% of its value.

The big idea of Fractional Property investment and even Real Estate Investment Trusts looses out of steam because it is a financial investment and most banks dont view it the same as owning a house. Which means that leverage is out of the picture. With the option of drawing down equity out of the window the premise of potentially negative cash flows and very low rental returns suddenly seem like a dead duck in the water.

Which is why we at www.estatebaron.comwe also allow the option to invest in Development projects themselves. There are essentially two ways to invest in a Development project. One is Debt and the other Equity.

Most Development projects get a large portion of their project funded by banks and the remainder is funded by private money or second mortgage capital. If a crowdfunding site provides funding in place of a second mortgage then the returns after the platforms fees are going to be 6% to 12% per annum. This is a decent return for retail investors but second mortgage has little security. An early stage crowdfunding platform may not always have the capability to litigate for rights for years in case a project goes bust.

So if you are going to take a risk, why not get the commensurate returns for it in the form of an Equity position where you get rights to share in profits. However the risk is that profits are what is left from revenues after expenses. You can always have a shady Developer/Builder claim thousand dollar door knobs and leave nothing in profits to be shared. It will take only one bad actor to destroy the credibility of the platform.

In addition most Developers want certainty in funding. They put deposit and then they want to know that they will receive funding else its their neck on the line come settlement. While in the US projects get filled in hours, the depth of market in Australia or awareness of the concept is minimal. Guaranteeing funding is not possible in the early days of a crowdfunding platform.

So what is the solution to all of this? Well, we will finally have an answer in the next article!

The Australian government has finally made up its mind and decided equity crowdfunding could be a good idea. ASIC has been given some resources as it requested to study and establish the framework under equity crowdfunding can be established. We expect this process to go on for another few months and the regulations to be similar or slightly more conservative than what New Zealand is upto.

So instead of the current 20 12 rule which allows an issuer to make offers to 20 retail people to invest upto 2 million dollars we may see a far larger number of investors participate. This could be upto 200 or unlimited. It is also expected that crowdfunding platforms will be asked to self regulate to prevent a single retail investor from investing more than a certain amount which could be $5000 to $10000 a year. However the amount that can be raised would not exceed 2 Million.

ASIC will come back with the framework in a few months and then a new class of licenses called crowdfunding platform licenses would start getting issued. Expect this process and the first true retail equity crowdfunding offers to take about 6 to 12 months.

Equity crowdfunding for all its fancy connotations is essentially an investment. The only difference is the delivery and service vehicle is online. So the same factors which you keep in mind when making an investment such as duration, return, and risk would still be paramount. Just the fact that it is online wouldn’t make you pick an investment which offers significantly lower returns. In fact because the process is online you would probably want to see a higher return and a stronger level of security behind the deal presented.

While 2 Million is a significant amount for an early stage startup in terms of its funding, it is not a large amount for a real estate projects. The second issue is we are in an era of unprecedented liquidity. One prominent Melbourne area developer aptly told me, “We have money coming out of our bums!”. The only developers who are scrounging for small amounts are those who don’t have the credibility to secure these funds. The classic “Lemons” problem of Economics. You dont want non quality projects listed on the platform, if the first few projects go belly up it will destroy crowdfunding platforms for good in Australia.

So if we are going to make crowdfunding real estate happen the projects that are listed have to be from quality developers. These are in turn larger projects which have the advantage of securing quality project managers, auditors etc which give it a better chance of success. The size of the project also means that there is more return on offer which would make it more attractive to potential investors.

The equity portion of these investment offers is going to be significantly larger than 2 Million. Which is why even if crowdfunding deregulates and ends up including real estate investments we at estatebaron.com believe that doing a full retail public disclosure is still the way to go.