This 1001 Startup Idea from YoStartups is to create an online Crowdfunding Platform for Investments in Real Estate that can democratize investing in real estate by bringing in a lot of investors together with small money.
Market Definition for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The rapid rise in inflation across the world will impact traditional savings as interest rates are near zero. Germans, for example, have more than 5 trillion euros of savings, and the current 2% inflation will reduce the value of their savings by more than 100 billion euros per year and Estonians are at 3% of their 7 billion euros of private savings, which will take a 200-million-euro annual hit.
Real Estate projects are considered low-risk investments as they are based on tangible assets. Clubbed with the trends as mentioned above, it makes a solid case for individual investors to find alternate sources for investments, finding lucrative private investments like real estate which are easy to understand, flexible, secure, less volatile with regular cash flows (rental income).
Competitor Analysis for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
Prodigy connects accredited investors with Manhattan commercial real estate through a secure online platform to invest as little as $10,000 but with a portfolio of $20,000 in assets. The investors receive a statement of holdings along with frequent project updates. All investments are shortlisted by a stringent six-point vetting process, and bank accounts are run by a third party for transparency and better lending rates. They also co-develop their assets to mitigate the risk and to have better compliance with the timelines.
iFunding was co-founded by William Skelley and Sohin Shah in 2012. It allows investments as little as $5000 in six different asset classes, and each project has detailed information regarding the length of the project, returns, timelines, etc. The unique feature of this start-up is that their investors can get educated about their investments through webinars before investing in any project.
RealtyMogul another startup that has 140,000 users and allows individuals or realty companies to list themselves on the platform only after undergoing a strict due diligence process. For Equity deals, it has tied up with North Capital a broker-dealer partner for due diligence, to do a thorough background check and always visit the site as part of the process. They also fund only existing structures and not ground-up developments, so that the cash flow is immediate once the investment settles.
Pain Point and Target Audience for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
Earlier, Real Estate as an investment was not feasible for an individual investor as it was only available either through private equity in a real estate developing company or REITs (Real estate investment Trusts). The main problem was that every development project was time bound and filing it as a security with the regulatory authorities was inefficient, and real estate developers were not allowed to solicit directly with the investors due to regulations by Securities and Exchange Commission (SEC)
But in 2012, The Jumpstart Our Business Start-ups ACT modified few rules and regulations to permit direct marketing and solicitation to accredited investors. This change in rule allows real estate developers to solicit investments from individual investors through crowdfunding.
Traditionally investments into real estate were considered to be accessible only to the Uber rich due to the opacity of transactions and the high entry cost. But with crowdfunding, any individual can start investing based on their risk appetite and financial capacity.
Value proposition for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
It is estimated that over the last 15 years, real estate has outperformed stocks realizing an annual return of over 10% compared to S&P 500’s 6.7%. Also private equity funds like Blackstone which acquired Invitation Homes, a portfolio of Single Family Rental Homes and listed it on NYSE in 2017 for a premium of 215% over a public market investor.
The $27 billion Yale endowment, generated an approximate 13% annual return over the past 30 years by allocating roughly 30% to private investments like real estate and venture capital.
In the mentioned crowdfunding platform, the investments can be made 24/7. The properties are pre-vetted, and the hassles of being a landlord are avoided as the paperwork, and the platform makes the rental collections. The asset management fees are lower than the traditional fund management fees, mutual fund fees, etc.
Business Model for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The start-up will charge a very nominal fee to manage the funds on the investor’s behalf which will be inbuilt in the financial model of the products itself. It will also charge a success fee if the investment exceeds the agreed return rate.
The start-up can also charge the developer a small fee for listing on the platform and later to raise funds on their behalf. The start-up will have to follow the law of the land to ensure that all the compliances are completed.
Way to Market for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The start-up will have to first register itself with the local regulator’s, example, Securities and Exchange Commission (USA) or the local supervision authorities on Finances in the country of operations. The team member with an in-depth domain knowledge and industry contacts will have to start working on deal flows, and the team member with captive investors will have to start getting investors on board after doing due diligence for each of them and confirming the source of funding.
Milestones for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The start-up will have to successfully raise funds for one project, preferably not ground up as it can immediately start realizing cash flows to build investor confidence. The start-up in the first year should focus on deals which can generate immediate cash flows to keep the investor confidence high and cover operating expenses.
After successfully reaching a critical mass, the start-up should tie up with institutional partners to underwrite medium to large scale projects as an equity partner.
Investment Needed for Prototyping of 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The start-up will have to raise up to $120,000 to develop an online platform for both the investors and developers to access and host their offerings online. These funds can be raised from accelerators like MetaProp NYC, Area(NYC). Elm Spring(Chicago), PiLabs(London).
Team Capability for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
The founding team should ideally consist of people with experience in Commercial or residential brokerage of properties. Experience as asset managers or investors in real estate portfolios with large corporations.
Another team member with experience in developing Fintech applications based on big data, analytics, and modeling expertise is preferred.
Investors/Expert Take for 1001 Startup Ideas – Crowdfunding Platform for Investments in Real Estate
Crowdfunding is just a platform and is only a front-end solution for investors to get access to the investments and developers, and vice versa. However, the real work will be done by the underwriters, domain specialists with experience in pre-market acquisitions of properties. Also, a start-up to be successful, they will have to leverage its relationship with quality sponsors, ensure transparency, pay investors on time and have user-friendly entry and exit options.
In 2015, property debt and equity crowdfunding totaled $7.8bn, against $760bn invested in commercial real estate. Real estate still accounts for only 5% or less of the crowdfunding markets in China and the US, but it accounts for more than 20% in the UK.
Crowdfunding platforms s are looking at hotels and properties with more than 30% vacancy. As they can generate better returns after renovations, better property management, rebranding to boost occupancy.
As the conventional instruments of savings are generating lower returns compared to real estate right now and the deal sizes have gone down with crowdfunding, the real estate crowdfunding market looks more promising than ever.
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