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Five Myths about Real Estate Crowdfunding

October 31, 2016 - Crowdfunding

Author : Prodigy Network

When new investment options emerge, so do many misconceptions. Real estate crowdfunding is no exception. Now that it is being positioned as one of the most suitable financing and/or fundraising options in the industry, it is only natural that diverse opinions should arise.This is why we have debunked a few popular real estate myths. If you are planning to invest, your misconceptions will be clarified here.

1. Real estate crowdfunding is not regulated

This varies from one country to another but in the United States, where Prodigy Network is registered, there are crowdfunding regulations.They were introduced under the JOBS Act in 2013. Title II of this Act came into force at the beginning of that same year, allowing for “private offers(such as Prodigy Network’s real estate projects) to be massively publicized and permitting the creation of online platforms, social networking profiles, the use of advertising channels, and more. Initially, this Act restricted the world of American investors only to those who were accredited investors, a restriction that does not apply to those who invest internationally. However, in May 2016, Title III of this Act was enacted, allowing non-accredited investors to participate in this model.

See more about Title II of this Act in this video:

2. Only those projects that do not obtain financing from other sources become real estate crowdfunding offers

In Prodigy Network’s case, real estate crowdfunding is not only used to raise funds and develop projects, but also to give access to the type of assets that have been historically attractive to institutional investors or to those with high purchasing power. These include institutional-quality real estate projects in major markets such as New York’s.  Likewise, the investment we raise through crowdfunding is combined with traditional debt, typically provided by recognized financial institutions such as  Vanbarton Group or Bank of America. These institutions  are characterized by their policy to conduct an exhaustive financial investigation before granting this type of loan.

The above shows that our projects are attractive to all kinds of investors. However, we have chosen crowdfunding as our business model and small and medium investors as our main market.

3. Crowdfunding platforms are showcases for third-party projects

This is true for some real estate crowdfunding platforms, but not for Prodigy Network. We are vertically integrated. Besides raising funds, we are also co-developers and investors of the crowdfunding projects we promote. This means that we are present throughout the project’s development; from its structuring stage to the moment we distribute returns to our investors. This allows us to exert greater control over the final results and to create an additional level of protection.  

Read more about our competitive advantages in this infographic: 7 reasons to invest through Prodigy Network.

4. Investors lose their money if the project does not work, or is stopped

The natural operational process of any sort of crowdfunding project arranges for the money to be restored to investors if the fundraising goal is not reached. This prevents investors from losing their money due to lack of funds. In addition to this crowdfunding feature, Prodigy Network works with NES Financial, an external third-party fund administrator. This entity keeps the investors’ capital in a custodial account until certain project milestones are met and verifies that the capital is being used appropriately while providing annual asset valuations.

Another real estate crowdfunding advantage is that the investors are already participating in a tangible asset, which in itself guarantees return on the investment. 

5. Real estate crowdfunding does not pose a risk to its investors

Risks are inherent to real estate projects and, for this reason, it is not correct to say that investors are exempt from any risk. Delays in development, improper use of resources, and changes in market conditions are main risks. Prodigy Network has different strategies to mitigate each one of them:

Delays in the project’s development:

  1. As we have already mentioned in this article, in Prodigy Network, we are co-developers in all our crowdfunding projects; this allows us to exert more control over the property’s development.
  2. In our model, Prodigy Network obtains profits by stages; that is, we receive benefits after achieving certain minimum return goals for our investors. In this way, if delays happen, we are the most affected because we see our gains vanish.
  3. Prodigy Network only partners with recognized local developers that have solid experience, in-depth knowledge of the construction process, and an action plan for possible delays.

Change in market conditions:

  1. We structure our projects by running financial models with the most conservative assumptions, so that, if market conditions were to have a downward trend, our projections would already include those corrections and adjustments.
  2. We are developing projects geared toward only two real estate segments that are currently booming and are expected to continue in this trend for several years: long-stay apartments and co-working spaces.
  3. We create, for our investments, different exit strategies that may allow for flexibility upon the event of market changes. For example, for one of our projects, the exit strategy was to sell the project after two years of operation, yet, if for some reason the market conditions were to change, we had an action plan that would allow us to keep the property running for an extended period of time, pending more adequate market conditions.

Improper use of resources

As mentioned in the fourth myth, all capital raised by Prodigy Network through crowdfunding is held in custody by an external fund administrator. NES Financial’s crucial role is to protect the money and to release it only when certain project milestones have been achieved.

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