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Real Estate Crowdfunding Basics
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Crowdfunding
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. In real estate, it allows investors to pool their capital to invest in properties.
Real Estate Crowdfunding Platform
An online marketplace that connects real estate developers seeking funding with a crowd of investors willing to provide capital in exchange for equity or debt.
Accredited Investor
An individual or entity that meets certain financial criteria and is therefore allowed to invest in securities that may not be registered with financial authorities. In real estate crowdfunding, these investors can access more exclusive investments.
Equity Crowdfunding
A form of crowdfunding where investors receive ownership shares in a company or property. In real estate, it means investors own a portion of the property and may receive dividends from rental income or a share of the capital gains.
Debt Crowdfunding
Investors lend money to the property owner or developer and receive interest payments in return. It's akin to giving a mortgage loan, where real estate serves as collateral.
Minimum Investment
The smallest amount that an individual can invest in a crowdfunding campaign. Real estate crowdfunding often has a higher minimum investment compared to other types of crowdfunding due to the nature of the assets involved.
Internal Rate of Return (IRR)
The annualized effective compounded return rate which can be earned on the invested capital in real estate. It's a measure to evaluate the profitability of a potential real estate investment.
Liquidity
Refers to how quickly and easily an asset can be converted into cash. Real estate investments made through crowdfunding can be less liquid than other types of investments because they are tied up in physical properties.
Sponsor
The real estate developer or company that is seeking to raise funds through a crowdfunding platform. They are responsible for managing the investment property and its operations.
Capital Stack
The layers of financing sources that make up the total capital investment for a real estate project. It includes equity, mezzanine debt, senior debt, and sometimes other types of financing. It is important to understand the capital stack to determine the risk associated with each layer of investment.
Distribution Waterfall
A contractual arrangement that outlines the priority of payouts from a real estate investment's cash flow or proceeds. It dictates who gets paid first and how much, guiding how returns are distributed among investors.
Pre-Funding
A situation where the crowdfunding platform provides funds to the real estate project before it raises the necessary amount from the crowd. This can accelerate the funding process and provide confidence to other investors that the project has backing.
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