The different ways of using collective investing in real estate
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By Scott Picken
Investors currently have two main options to pool funds together with people or businesses to invest in real estate. Whether it’s a stokvel or crowdfunding, this is based on a principle that uses the collective buying power of a group to ensure that each participating individual can attain ownership of a property. This levels the playing field for investors, especially in circumstances where a lack of funds limits an individual's ability to invest in private or commercial real estate.
Since the 19th century in South Africa, stokvels originally came about to give people options at cattle auctions, as it may be unaffordable for one individual but by using a community’s power to fund the purchase, then it becomes affordable. While both stokvels and crowdfunding are based on similar principles, the main difference is how the group funding is administered and the cash custody when pledging specific amounts.
The main differences between stokvels and crowdfunded investments
All investors need to do their own due diligence before committing to these forms of financial savings, especially as a stokvel is considered a more informal method. Stokvels are self-regulated when it comes to forming rules, the responsibilities of each member, the set amount to be pledged, and how the group fund is affected when an individual can’t meet their financial obligations or leaves the group. “Online crowdfunding allows for expanded access to larger communities and networks as well as the beauty of the power of collective buying”, says Riaan van der Vyver, Chief Investment Officer of Wealth Migrate.
Here’s an example of how this equity crowdfunding method works on the online marketplace, funds are collected to purchase a large property like an apartment block. Investors then receive pay-outs each quarter based on the revenue generated by the property and the amounts that were individually pledged. While there is a minimum investment amount, each individual is left to decide whether they can invest more and potentially receive larger returns.
The benefits of crowdfunding to investors
Crowdfunding gives a South African investor more options in the local and global property market, through the evolution of an online savings scheme into private and commercial real estate investments.
While a stokvel’s reach may be limited due to its self-regulation, crowdfunding is given a wider reach through its digital approach. More potential investors are able to see it, share it and can choose to participate. In terms of risk and diversification, crowdfunded deals also tend to have a lower risk as since it's not tied to fluctuations in the stock market, and investors have direct control over the diversity of their investment portfolios.
What is exciting... is how closely online crowdfunding relates to the behaviours and practices we, as South Africans, already adopt in our lives: stokvels, burial societies, church fundraising, school raffles.
Scott Picken is the CEO and Founder Wealth Migrate