For those looking to get into the real estate game without becoming a landlord, one alternative to the traditional bricks and mortar is mortgage investing. To help make sense of the mortgage investing landscape, CREW took a look at some of most popular options available, including crowdfunding.
Crowdfunding is no longer a buzzword reserved for start-ups and tech entrepreneurs. Today, crowdfunding is a well-established vehicle for entrepreneurs to leverage the power of the "crowd" while enabling the crowd to participate in exciting and/or lucrative projects.
Real estate crowdfunding allows individuals to invest in existing apartment buildings or in buildings under development — an opportunity that currently is available only to wealthy individuals or institutions.
Equity crowdfunding allows small and medium-size businesses to raise capital without the time and expense of issuing detailed financial reports and offering shares for sale on the stock market. It is viewed as a low-cost alternative to taking a company public by issuing shares in an initial public offering. Equity crowdfunding would allow a large number of investments from individuals to be pooled in exchange for securities.
Such investment opportunities were called public offerings by the OSC before its consultation last year. Only accredited investors — institutions, people with incomes of more than $200,000 or people with more than a million dollars in assets in addition to their home — were allowed to make such investments.
Under its proposal, entities would be permitted to raise capital from the public by the issuance of securities through an independent and regulated website called a "portal." The exemption is designed to enable an issuer to access a potentially large number of equity investors on a cost-effective basis via the Internet and social media, regardless of an investor’s profile or investment sophistication, subject to certain requirements for the protection of investors.
No investor is permitted to invest more than $2,500 in a single investment or $10,000 in total investments in a calendar year. An issuer is not be permitted to raise more than $1.5 million in any 12-month period under the crowdfunding exemption.
Open Avenue, a company based in Kitchener, Ont. has a model for equity crowdfunding. “We are the first real estate crowdfunding portal in Canada,” says Tim McKillican, president and co-founder of Open Avenue. “It’s a new way of being able to invest in your community for individuals that does not exist right now."
The current rules [in August 2014] exclude the vast majority of people. “The accredited investor market is only four per cent of potential investors,” says McKillican. “It's not fair to anyone else, maybe they don’t have millions of dollars, but they want to invest $500 or $1,000 in something in their local community. They know the community they have a special interest in it. Why should they be crowded out?”
Three of the four men behind Open Avenue are principals in Revel Developments, while McKillican partners with the company on a project-by-project basis. To begin with, Open Avenue would only crowdfund Revel Development projects, but McKillican said the long-term plan is to open up the model to developers across the country. McKillican said the objective is to see returns of eight per cent a year for apartment buildings that already exist, and 12 per cent for buildings under development.
The higher returns for buildings under development reflect the risk involved in buying distressed or old properties that need extensive renovations. The rate of return for new projects reflects the cost of getting the approvals, builders and tenants in place for a new development.
This article was originally published in the August 2014 issue of CREW
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