Crowdfunding has arrived in the Toronto residential real estate market, but while these deals have the potential to be lucrative for investors, they’re not without risk.
Crowdfunding is a way to finance a venture by raising small sums of capital online from a large pool of people, allowing small-time investors to carve out a slice of big projects that would normally be beyond their reach.
It has taken root in the Canadian commercial real estate sector in recent years, and now it’s growing as an alternative way to fund residential projects.
“I think there’s a lot of interest with individual investors with residential real estate given what’s happening in Toronto and Vancouver markets, specifically,” said Hitesh Rathod, CEO of real estate crowdfunding platform NexusCrowd Inc.
NexusCrowd successfully closed two commercial real estate deals in the Greater Toronto Area – a shopping mall in Mississauga, believed to be the first project of its kind in Canada, and 110,000 square feet of industrial properties in Mississauga and Toronto.
Now, it has its eyes set on the residential sphere, partnering with Downing Street Financial in its first debt transaction to develop a 25-acre multiphase residential condominium project in Ajax, Ont.
“What we’re trying to do is provide access to different types of investments within the real estate space on the development side, which is very hard to access for individual investors,” Mr. Rathod said.
That was the draw for Hockey Night in Canada producer Sherali Najak who, who has invested both of NexusCrowd’s campaigns and is eyeing the Ajax condo project.
Although he’s been playing the market since he was a teenager and is considered an accredited investor, he would never have access to a real estate deal of this scale on his own.
“It allowed me to invest with the big boys,” Mr. Najak said. “Or at least alongside the big boys.”
Another crowdfunding platform, Open Avenue, is offering investment opportunities in multifamily residential real estate projects in Kitchener, Ont., and president Tim McKillican says it will offer residential real estate deals in the GTA soon.
One of the appeals of crowdfunding, he says, is that it allows you to “invest directly into your community.”
That’s something Mr. Najak appreciates.
“Real estate for me is something that you can touch and feel,” he said. “I could drive right by there. I could see it. I could see the buildings that we’re buying … it was a kind of a neat feeling to be a part of that.”
The lure of these ventures is clear, said John Andrew, a real estate expert at the Queen’s University School of Business. Developers can raise funds at a lower borrowing rate than they could through a bank loan, while investors have the potential to earn more bang for their buck than by investing in a traditional real estate investment trust.
“High returns, diversification of your portfolio, all of those benefits are there, and probably at a lower transaction cost,” he said.
But, he added, it can be risky for an inexperienced investor to enter the real estate market, which is complex and high stakes.
“Do those small investors really understand what they’re getting into? Are they being given the appropriate amount of information? Do they understand that information? Are they getting any sort of independent professional advice?”
This has been a major concern in Vancouver, where at least two crowdfunded real estate deals are under investigation by the B.C. Securities Commission for allegedly enticing buyers to pay inflated prices without getting complete information on the risks or how demanding the rezoning process is.
That’s where new rules around crowdfunding come in.
New regulations introduced by securities regulators in most provinces widens the pool of potential crowdfunding investors, while placing some restrictions on how much they can spend.
Previously, crowdfunding was limited to accredited investors – those with a net worth of $5-million or $1-million in investable assets – who make up only about four per cent of the Canadian population, according to the Ontario Securities Commission.
Under Ontario’s new regulations, which came into effect on January, retail investors are able to invest up to $10,000 annually. Individuals earning at least $75,000, or $125,000 a household, can invest up to $30,000, or $100,000 annually if they receive advice from a portfolio manager, investment dealer or exempt market dealer.
Open Avenue’s Mr. McKillican welcomes the new regulations, which he says “strike the right balance between protecting investors as well as allowing opportunities for everyone to get involved in private real estate investment.”
“It gives us an opportunity to reach all types of investors as opposed to just accredited investors or wealthy investors,” he said.
“That’s the beauty of crowdfunding. We can target all types of investors and people can invest an amount that they’re comfortable with, so they don’t have to have a large income or a large bankroll to get involved and invest a small amount.”
NexusCrowd, however, has no intention of opening up investment opportunities to the average Joe.
The company exclusively targets “ultrahigh net-worth individuals who can write really large cheques or institutional investors,” Mr. Rathod said. What’s more, it only partners with developers who fund 50 per cent of a given project.
“The rationale for that is to ensure that our partners have significant skin in the game and their interests are aligned with our investors,” he said.
Whatever the business model, it’s still not clear whether crowdfunding real estate will grow in Canada to the degree it has in the United States, wherehundreds of millions in capital have been raised for real estate development, and where some savvy entrepreneurs have taken to crowdfunding single-family homes and flipping them for a profit.
“It is a very, very new area,” Mr. Andrew said. “I don’t think anybody really knows at this point whether this is going to be a big thing or even really be a viable alternative to traditional lending.”
As to whether he’ll keep investing in these ventures, Mr. Najak said, “it really comes down to the numbers.”
“Once I took the emotion out of it in terms of the platform and all the rhetoric around it, it’s basically about the deal.”
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