Glossary

Investment Structure

Indicates whether the project is an equity or debt investment offering.

Property Type

Indicates the different types of property (e.g. residential, office, hotel) that each project consists

Currency

Indicates the project’s currency of investment.

Distribution Frequency

Indicates the project’s dividend distribution (for equity) or interest payment (for debt) frequency (e.g. annually, semi-annually, quarterly).

Target IRR (%)

Indicates the target internal rate of return of a project provided by the real estate crowdfunding platform. The internal rate of return is a metric used to demonstrate a return profile, which is made up of the project’s dividend yield (rental income) and capital gains.

Estimate Holding Period

Indicates the expected investment period of a given project (typically 3-5 years).

Minimum Investment Amount

Indicates the minimum investment amount an investor would need to commit to a given project.

Purchase Price

The project’s gross purchase price.

Fractional Ownership

A method in which several unrelated parties can share in, and mitigate the risk of, ownership of a piece of real estate (includes but not limited to crowdfunding, peer-to-peer lending, and security token offering).

Crowdfunding

The practice of funding a project by raising small amounts of money from a large number of people.

Peer-to-Peer Lending (P2P)

The practice of lending money to businesses that match lenders with borrowers.

Security Token Offering (STO)

A crypto token that passes the Howey Test (a test created by the Supreme Court for determining whether certain transactions qualify as investment contracts) is deemed a security token. These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations.

Real Estate Investment Trust (REIT)

A vehicle allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties.

Open project

A project that can be worked on in real-time and with a defined deadline.

Closed Project

A project that is no longer seeking for funding.

Equity

A value attributable to the owners of a business.

Debt

A sum of money that is owed or due.

Residential

A type of property that is designed for people to live in, such as apartments & houses.

Commercial

A type of property that is designed for people to work at, such as offices.

Hospitality

A type of property that is designed for people to host guests, such as hotels & motels.

Retail

A type of property that is designed for the selling of goods to consumers, such as restaurants and shops.

Land

A property that is designated by fixed spatial boundaries.

Student Accommodation

A type of property that is designed to rent to students. It is also known as student housing.

Industrial

A type of property that is designed to industrial activities, such as warehousing, and manufacturing,

Medical

A type of property that is designed to lease to members or organizations within the healthcare community, such as hospitals.

Resort

A type of property that is frequented for holidays or recreation.

Re-gearing

the practice of renegotiating your lease terms during the course of the lease

Cash return

Cash return, also known as Cash-On-Cash or Cash yield, is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. It measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. [Cash on cash return = (Annual pre-tax cash flow) / Total cash invested]

Return on Equity

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets.ROE is considered a measure of how effectively management is using a company’s assets to create profits.

[Return on Equity = Average Shareholders’ Equity / Net Income]

Equity Multiple

A financial leverage ratio that measures the portion of company’s assets that are financed by stockholder’s equity. It is calculated by dividing a company’s total asset value by total net equity. [Equity multiplier = Total assets / Total stockholder’s equity]

Leverage

the debt portion within the capital stack. The ratio of a company’s loan capital (debt) to the value of its ordinary shares (equity)

Gross Asset Value

the total sum of value of a company owns.

Net Asset Value

the value of an entity’s assets minus the value of its liabilities.

Core

Asset Characteristics:
High quality
Limited capital needs
Stable/run-rate occupancy
Well managed
Passive strategy

Investment Characteristics:
Yield-oriented (CoC %)
Lower return target, e.g. >5% IRR
Longer-term investment, may or may not seek exit as liquidity transacted through platform’s secondary market.
Low-to-medium leverage.

Primary Return Driver
Stable net cashflow from tenancy profile & limited outgoings + capex.

FAQ

About Denzity

What is Denzity?
We are a database of the Real Estate Fractional Ownership industry. Users can find different information on Real Estate Fractional Ownership projects from different platforms around the world, all in one place.

How does Denzity work?
We are a database for investors to search and conduct due diligence on Real Estate Fractional Ownership projects. The information provided on projects (see: Project Listing) and platforms (see: Platform Profile) are sourced directly from the Real Estate Fractional Ownership platform.

Users can click-through directly to the project of interest. On the platform’s website, users would then complete their know-your-client, anti-money laundering, and risk disclosure form before they can invest. During this part of the journey, Denzity is not involved and does not intermediate transactions (between the investor and platform).

What is Denzity’s goal?
We open up the Real Estate Fractional Ownership industry by improving accessibility, increasing transparency, and expanding the volume of transactions in the global real estate market. We provide a simple & intuitive portal for a wide variety of investors to search & filter investment opportunities.

We are focused on creating a safe & transparent ecosystem for users to search & filter Real Estate Fractional Ownership investment opportunities.

Is Denzity an investment firm?
No, we are not an investment firm. We display Real Estate Fractional Ownership projects and do not intermediate for any investment opportunities.

Does Denzity provide financial advice?
No, we do not offer any financial advice and we are not associated with any of the Real Estate Fractional Ownership platforms available on Denzity.

Is Denzity a Real Estate brokerage firm, or a Real Estate Fractional Ownership Platform?
No, we are not a real estate brokerage and we are not a Real Estate Fractional Ownership Platform. We do not sell shares or intermediate Real Estate Fractional Ownership Projects displayed on Denzity.

Does Denzity make any investments in Real Estate Fractional Ownership Platforms?
No, we are an independent third-party that connects users with Real Estate Fractional Ownership platforms. We do not invest in any projects or offerings.

Does Denzity charge users a fee?
Denzity is free to users.

How do I sign up and subscribe to Denzity?
Come join our community here: https://www.denzity.io/subscribe

How do I reach you if I have questions?
If you have any questions, please send us an email at: [email protected]

We will get back to you promptly.

What is the best way to find out about what’s happening at Denzity?
Subscribe, so we can keep in touch! https://www.denzity.io/subscribe

We will share news with you when we hit milestones and let you know of any events during our journey!

Where is Denzity based?
Denzity is based in Hong Kong.

To learn about how we started, read our story: https://www.denzity.io/about

About Real Estate Fractional Ownership

What is Real Estate Fractional Ownership and how does it work?
Real Estate Fractional Ownership makes investing in real estate more accessible by lowering the minimum investment amount committed by each investor. Before Real Estate Fractional Ownership, real estate investment required a large investment in a high value, illiquid asset which was held for a few years.

Real Estate Fractional Ownership means a number of investors pool their money together and acquire a piece of real estate, for example an office building, which is managed by a professional asset and property management team. An investment firm (typically called a Sponsor) would begin by engaging with a Real Estate Fractional Ownership platform to raise the required equity and/or debt.

Real Estate Fractional Ownership platforms identify the real estate investment, based on their expertise and preference, then conduct the necessary steps to invest such as market analysis and property due diligence, legal and financial due diligence and arrangements. The Real Estate Fractional Ownership platform then sets a timeline to raise the required equity and/or debt and makes information available to investors.

What are the benefits of Real Estate Fractional Ownership?
Real estate is one of the oldest forms of investing and demonstrated a long history of consistent capital growth. Real estate combined with fractional ownership brings greater access to a wider pool of investors, and as a result, creates an abundance of opportunities.

Real Estate Fractional Ownership resolves key issues faced with traditional real estate:
Low Capital Requirements: By lowering the entry barriers, a greater number of investors can overcome the traditional barriers of entry into the real estate market through fractional ownership. Smaller and flexible commitments help reduce risk.
Better-informed decisions: From buying, managing, and overseeing the project, Real Estate Fractional Ownership Platforms offers visibility of property details and ownerships. They provide the transparency needed for you to understand and monitor your property investments.
Build a diversified portfolio: You can build a portfolio of various properties based on your preferences freely. By allowing you flexibility to commit, each individual Investor can decide how much to commit to each project. This allows you to have peace of mind and control when allocating your wealth based on your own goals.

Real estate co-investment has always been around. How is crowdfunding different than co-investing, and why will it reach mass markets?
It is important to understand that co-investment and crowdfunding platforms have the same role of providing an investment firm with the necessary capital to make a large real estate purchase (investment), for example:
With co-investment, a small apartment building at US$10 million would have raised US$5 million in investor’s equity from 5 to 10 investors, with each investor averaging an equity commitment of US$500,000 to US$1,00,000.
With crowdfunding, a small apartment building at US$10 million would have raised US$5 million in investor’s equity from 500 to 1,000 investors, with each investor averaging an equity commitment of US$5,000 to US$10,000.

Prior to Fractional Ownership, investors could only achieve diversity in their investment portfolio by making investments in different companies’ stocks and bonds. This meant investors would remain susceptible to market dynamics, irrespective of the underlying companies’ financial performance. Real Estate Fractional Ownership is a way for investors to achieve real portfolio diversification by diversifying their holdings into fragmented ownership of real estate.

Real Estate Fractional Ownership allows investors the opportunity to invest in real estate through fractional ownership, which otherwise would not have been possible before.

What is Fractional Ownership?
Fractional ownership occurs when two or more investors collectively acquire an asset. For example, five different people purchase a residential home for US$100,000 – each person would have invested US$20,000 each – this is fractional ownership.

Investors can invest in different types of real estate located in various cities around the world, while leveraging on the Real Estate Fractional Ownership Platform’s specialised knowledge and professional expertise in managing each Project.

We believe Real Estate Fractional Ownership is the future of real estate investing as it allows a greater number of people to participate in the real estate market worldwide. We aspire to open the doors to make the Real Estate Fractional Ownership market accessible to everyone.

What do Real Estate Crowdfunding platforms do?
Real estate investment is typically characterized by equity and debt investments, with both focus areas having sub-tiers such as preferred equity participation or 2nd lien loans. Most Real Estate Crowdfunding platforms specialize in either equity or debt crowdfunding investment, as both require a different set of skills and expertise.

Equity crowdfunding has a greater risk-reward with more opportunities in the market as compared with debt crowdfunding. Debt crowdfunding targets a smaller section of the real estate market where projects are unable to obtain a bank loan for different reasons or an investment fund may seek to purchase a homeowners’ mortgage which is in distress and provide a more tailored approach in their mortgage payment schedule.

Beginning with the 2012 JOBS Act (Jumpstart Our Business Startups Act) in United States. Subsequently, Real Estate Crowdfunding platforms in other countries (such as United Kingdom, Australia, and Germany) began to surface.

Real Estate Crowdfunding platforms’ primarily focus on buy & hold strategies where investors are provided with an investment memorandum containing cash flow forecasts based on small or minor changes to the property’s existing tenancy schedule and operations.

Higher return can be achieved by Real Estate Crowdfunding platforms who now provide the investment opportunity to fund a property’s development phase, whether on a piece of new land or redeveloping an existing or adjacent building.

You have the choice of making an equity or debt crowdfunding investment in a buy & hold or buy & develop the opportunity.

Real Estate Crowdfunding platforms need to wear multiple hats and constantly juggling with different tasks to the real estate investment execution such as licensing, fundraising, marketing, regulation, and updating tech etc. As each Real Estate Crowdfunding project is different (investment thesis, sponsors, location, properties etc.), Real Estate Crowdfunding platforms need to consistently educate, attract, and show case investors. Denzity can relieve some of the burdens they would need to do such as facilitating updates, Investors queries, introducing sponsors, and introducing software etc.

Can a Real Estate Crowdfunding platform be a Sponsor?
Yes. Some Real Estate Crowdfunding platforms could also be a Sponsor.

How do you participate in Real Estate Fractional Ownership and who is it for?
Real Estate Crowdfunding is open to everyone. Platforms will perform regulatory checks on potential investors, such as know-your-customer (KYC) and anti-money-laundering (AML) procedures. Once regulatory checks are completed and investors find a project they are interested in, they can “subscribe”, meaning that they will sign up to a subscription agreement and provide the agreed amount of funding.

Once subscribed, Investors generally receive reports on project progress, their distributions and expectations of the project. Cash distributions are commonly received periodically until the Sponsor has either sold their ownership or the Sponsor concludes the project by selling the property and the Investor receives their ownership of the net sale price.

Real Estate Crowdfunding is for a wide range of people who want to have more real estate investments in their portfolios. You can find more information in the “For Members” section in the FAQ.

What are the cost benefits to Real Estate Fractional Ownership investors?
Real Estate Fractional Ownership investors benefit from economies of scale given the nature of how it works. In each project, investors utilize an investment fund to make the acquisition and maintain the underlying operations.

Several costs are involved in each project:
Fixed costs: Costs attributed to hiring investment professionals and sector professionals with real estate expertise. These costs are typically named as “asset management fees” or “performance fees”
Variable costs: Costs attributed to external third-party advisors such as accountants, lawyers or experts to provide advice regarding KYC and other matters. For example, a lawyer could suggest a type of legal structure that would improve operational performance by reducing the taxes payable.
Investment costs: Costs attributed to acquisition costs and costs of borrowing should there be bank borrowings to finance the investment. Investment funds may also pay a broker/agent a fee for intermediating the transaction process.
Operational costs: Costs attributed to reporting, tax filing, maintenance of accounts / finances to monitor the individual project’s performance and marketability.

Real estate Fractional Ownership provides you with accessibility to real estate ownership and benefits from contributing at only a fractional cost of the investment and ongoing costs associated with real estate investment.

Why is Real Estate Fractional Ownership a good Real Estate investment alternative?
Real estate investment has always been a primary wealth creation tool for high net worth individuals, families, corporates, and institutions all around the world, whereby a large amount of capital is placed into a relatively illiquid investment for a number of years.

Real Estate Fractional Ownership allows investors to diversify their portfolio by investing in different projects, and thus lowering their risk exposure. This can further reduce exposure in times of economic recession.

For Members

How does Denzity charge users?
Denzity is free for all members.

How does Denzity help me find the right real estate crowdfunding project?
Denzity’s metasearch algorithm is designed to provide you with a tailored result based on the information you have provided. Our focus is to understand your investment preferences to provide a tailored approach in connecting you with the most suitable Real Estate Crowdfunding Project.

Denzity is built to continually learn your preferences and update listings to find the right match for you!

What if I am aware of a Real Estate Fractional Ownership Platform that is not listed on Denzity?
Please let us know by writing an email to us at: [email protected]
We will reach out to the Platform to discuss partnership opportunities.

If I am interested in a project that I find on Denzity, how can I get more information?
Every project listed on Denzity has a direct link to the Platform offering it. When you click on the link, it will take you to the Platform’s website where you can find more information about the project.

How do I choose one Real Estate Fractional Ownership Project over another?
Depending on your investment preferences, everyone’s project requirements differ. Usually, users will look at project returns, the length of holding time, and also the amount that you want to invest in. Other common investment preferences include geographical area and type of property.

We recommend reading more about the Real Estate market and understanding the area / type of property that you are planning to invest in, so you are aware of your risks, market fluctuations and are notified of the latest market updates.

Who should be Denzity’s Member?
Denzity Basic is for everyday investors and retail investors: Professionals that want to put savings to work through alternative investments. Denzity Basic Members can access Denzity’s innovative technology solution to find their right projects such as Project Bookmarking and Project Comparison.

Denzity Pro is for Institutional firms and family funds: Firms that want to invest in asset-backed investments by relying on local professionals to execute the investment, saving them time and money. Denzity Pro Members can access the solutions that Denzity Basic Members can access with additional solutions such as Participation Benefits and Organization Servicing.

What is Denzity Plus?
Our Denzity Plus Membership is for professionals committed to sharing and exchanging ideas to benefit Denzity’s communities. Please contact us for more information.

For Platforms

Why should I list my project on Denzity?
Denzity is a database of the Real Estate Fractional Ownership industry. Our search algorithm matches users with the most suitable fractional ownership projects. By connecting the right investor with the right project, we are looking to improve accessibility and participation in the global real estate market through fractional ownership.

Based on each Investor’s preference and search criteria, we aim to drive better quality visits to your Platform. Denzity develops a greater understanding of each individual user as we gain more insight of their preferences of Real Estate Fractional Ownership.

We provide Platforms with various reporting packages that inform you with key data points on the types of Investors interested in your listings. This would include details on where these Investors are from, how much they typically invest, and their average investment horizon, among other information.

What is the user journey on Denzity?
Denzity focuses on directing Members to you. The members provide their criteria for a search and are presented with their tailored results. Based on the results, they decide what to pursue. Then, they will be directed to the relevant Platforms.

The onboarding (including KYC & AML) and subscription process is conducted in-house by you, with no difference than any other individual finding your website through search engines (such as Google or Bing).

You have the editorial control of the information being presented, based on Denzity’s listing template. This means that any content available on projects will be provided exclusively by you.

How can Platforms advertise on Denzity?
Denzity encourages Real Estate Fractional Ownership Platforms to set-up their own company profile so that our members understand more about your Platform offerings (e.g. management expertise, services offered, track record). Not only does this highlight your brand and ethos but it provides you with the opportunity to differentiate yourself from other platforms.

We encourage Platforms to communicate and engage with our users by sending relevant market updates either through emails or personalized messages so they will be informed of your developments.* In addition, we offer display advertising for real estate related businesses, as this complements the services and adds value for our users.

*Any emails or personalized messages would be dependent on each Denzity user’s communication preference settings.

Is there a conflict of interest between Denzity and Platforms?
No, Denzity is a database for our users to search for their most suitable projects. Our search algorithm is based on each user’s preferences that develops over time.

We do not own any projects and all projects are provided directly by the Platforms on Denzity. As such, we simply direct users to Real Estate Fractional Ownership Platforms and receive a technology access fee and click-per-action fee from the Platform itself.

How much traffic will Denzity bring me?
We serve as a search engine that matches users with the most suitable projects available from Denzity. Once a user decides to find out more information about a certain project, they are redirected to the platform’s website.

Denzity charges a technology access fee and a click-per-action fee to each platform once a partnership has been formed. We always look forward to helping platforms increase user traffic and maximise sales opportunities.

What types of platforms does Denzity work with? Would Denzity work with other real estate fractional ownership type of platforms such as Peer to Peer platforms and STO providers?
We work with Real Estate Fractional Ownership Platforms to form partnerships in listing on Denzity’s system. This includes crowdfunding, peer-to-peer lending, and security token offering platforms which have real estate projects available for investment. Regardless of the platform’s size and experience, we aim to provide all platforms with access to Denzity and increase participation in real estate investment through crowdfunding.

If you are a Real Estate Fractional Ownership Platform, STO provider, or peer to peer Platform who is interested in working with Denzity, please contact us at: [email protected].

Does Denzity require exclusivity?
No, in fact Denzity would not provide exclusivity to any single platform.

We obtain publicly available information from the Internet and index this for our users. Our aim is to match Denzity users with the most suitable project through increasing project variety.

What information do I need to provide to have my projects available on Denzity?
Denzity values the importance of professionalism. We work with all professional parties (Platforms, Sponsors and other real estate related businesses) to provide users with the [highest match], while ensuring we comply with applicable laws, regulations and rules.

For Platforms, we require your general corporate information and once your platform has been approved, we will notify you so that you can begin advertising on Denzity.

How does Denzity get my information?
Denzity has its own technology to obtain the listings on the publicly available net. We only index your projects and make it easier for our users to find what they’re looking for. We do not amend any of the project information, and do not own any of your project listings.

How do I change or delete a listing?
Denzity automatically updates your project as closed once your project is closed on your website. However, if you wish to change or delete a listing that you see on Denzity, feel free to email us at [email protected]

How does Denzity make money?
If you would like to know more about our pricing and terms, please kindly contact us [email protected]

For Real Estate Professionals & Developers

Does Denzity accept listings from developers, sponsors, and brokers?
As of now, we do not intend to list deals directly from developers, sponsors, or brokers. We only wish to facilitate the process and transactions between investors and Real Estate Fractional Ownership opportunities.

I have a project that I want to finance with Crowdfunding. Can Denzity help?
We are not a Real Estate Fractional Ownership Platform, therefore we do not list any properties. However, we recommend collaborating with one of our partners, who are specialised in Real Estate Crowdfunding and will be able to list your project on their site. Once that is done, we will be able to collect that data and your listings will show up on Denzity (subject to approval)!

If you have any questions regarding which platform to use or what the difference is between platforms, you are free to browse their company profiles, or you can also email us at [email protected] for more information.

Do I have to pay?
Denzity is free for Investors. We charge a technology access fee and click-per-action to the Real Estate Crowdfunding Platforms once a partnership has formed.

Does Denzity accept advertisements from developers, sponsors, and brokers?
Absolutely, but only if the advertisement is not related to financing and we deem that the content is appropriate to our community! Please contact us by sending an email to [email protected]

Others

If I am not an Investor, Platform, or real estate professional, why should I subscribe to Denzity?
Our vision is to create a real estate crowdfunding ecosystem that is not solely focused on Real Estate Crowdfunding Projects. Our vision is to allow more people to be able to access and benefit from Denzity.

Why did we start Denzity?
We believe Real Estate Crowdfunding should be open to everyone – greater accessibility drives greater participation and economies of scale for the Sponsors. Given the plethora of real estate investment opportunities around the world, real estate crowdfunding means “the world is your oyster”.

Why participate in Real Estate Crowdfunding instead of traditional “safer” ways, like Bank Deposits?
Bank deposits or treasury bills represent the safest, lowest-yield form of savings – typically referred to as a risk-free rate. Any other form of asset-based income generating investment usually generates a yield above the risk-free rate.

Denzity on Real Estate Crowdfunding (Part 1 of 3)

Here at Denzity, we are passionate about effecting change in an asset class and primary tool for capital appreciation and wealth preservation maintained through generations. Real Estate Crowdfunding (“RECF”) utilizes technology as a medium by which property ownership can be spread and diversified among a wide demographic of investors from different places.

Real estate has traditionally been an asset class that only available to wealthy individuals. Real estate platforms, such as private equity funds, have therefore only been able to seek investment from accredited investors. Accredited investors are individuals with USD $200,000 annual income or USD $1,000,000 net worth.

RECF is a new medium made possible since 2012 with the introduction of Jumpstart Our Business Startups Act (also known as the JOBS Act). The JOBS Act means real estate platforms can access a wider demographic of potential investors. However, there are several key issues which arise as a result.

In this article, we will highlight the technical knowledge investors need before investing.

Real estate investment requires technical knowledge. This is why Platforms hire real estate and investment professionals to perform due diligence and benchmarking before making an investment. As an investor, you will usually be provided with an information package, primarily containing an investment memorandum (“IM”) and limited partnership agreement (“LPA”).

The investor would read the IM, which contains details on the real estate property and its market (geographic and type), along with cash flow projections based on the platforms forecasts. Platforms will explain what capital expenditures are needed to improve the building’s marketability and the tenancy schedule to achieve a certain return to investors — one of the key metrics used by investors to decide on investment opportunities.

As an investor, you would need to understand the terms and conditions of the LPA, a document which details the legal manner by which you participate in the project. An investor who subscribes for shares in an investment fund, the vehicle used to hold the project, would be subject to certain rights and obligations under the LPA. These obligations can present itself in the form of a legal and commercial obligation.

The point is that understanding these documents require specific knowledge predominantly held by investment professionals who are typically employed by investment funds. These investment professionals accumulated their specific knowledge and skillset having worked in the finance (e.g. banker) and/or legal (e.g. lawyer) fields.

For example, a real estate project purchased for USD $10,000,000 obtains a USD $6,000,000 loan from a bank. The bank provides the loan subject to a facility agreement (“FA”). The FA is a legal document which defines the project’s legal obligations, which are primarily to (i) pay interest to the bank, (ii) repay principal ($6,000,000) to the bank, and (iii) maintain certain metrics referred to as covenants, such as a specified loan-to-value (“LTV”).

As an investor, you should understand the FA which highlights one the key risks associated with the project and your investment. In the event, the project is unable to satisfy the covenants (e.g. unable to repay the bank loan principal), the project would be in default and your investment would become at risk.

Therefore, investors without the technical knowledge stand at a disadvantage to investment funds which hire investment professionals. So what’s the good news?

Denzity is backed by a team of real estate and investment professionals here to guide you along the way of searching and filtering RECF investment opportunities, and here to help you understand the key metrics and provide insights.

We hope these articles provide you with insight into the real estate investment process and journey!

If you’re not already signed up with Denzity, make sure to sign up to receive the latest updates!

What you need to understand about real estate capitalization rate (Part 1 of 4)

Real estate investment is an opportunity to generate regular income and achieve capital appreciation in a stable asset held over a 5–15 year period. Real estate investors typically compare investment opportunities start by using one key metrics: Capitalization Rate, aka Cap rate.

In this article, we highlight how you should understand how to compute the cap rate and how to use cap rate when comparing different real estate crowdfunding investment opportunities.

This is part 1 of 4 articles covering the real estate cap rate:

  1. What is the real estate cap rate?
  2. What you need to understand about the real estate cap rate?
  3. How does the real estate cap rate form part of your investment analysis?
  4. How leverage helps you achieve your investment goal in real estate.

Part 1: What is the real estate cap rate?

Cap rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. It is calculated by dividing the property’s net operating income (“NOI”) by the current market value or acquisition price of a property.

Capitalization rate = Net Operating Income / Current Market Value (Source: Investopedia)

Once an investor knows a property’s cap rate in a specific market, the cap rate can be used to compare with other types of real estate cap rates located in different markets around the world to understand which is more suitable to their investment preference. We have made a quick guide for you below:

Understand the Real Estate Cap Rate

That’s it!

Let’s use an example: an investor (Bill) wants to achieve a 12% annual return over 5 years by investing in real estate.

Bill decides to purchase an office building for $600,000 that generates $60,000 of net operating income (NOI), which represents a 10% cap rate. This means the property value would need to increase by at least 2% per year to meet Bill’s goal of 12% annual return.

Bill decides to achieve his investment goal by being more dependent on the cash flow (net operating income) generated as rent by the office building’s tenants, rather than a strong capital appreciation.

In this example, Bill is characterised as a defensive, income-based real estate investor seeking real estate investments that require minimal out of pocket expenses (e.g. refurbishments). In case you are wondering: yes, we will cover different investing style and types of investment play in future blog posts.

In Bill’s case, the cap rate is a key metric to begin his initial screen to compare real estate investment opportunities. For example, a shopping mall being sold at an 8% cap rate means that Bill would rely on (i) strong capital appreciation and/or (ii) leverage in order to achieve Bill’s goal of 12% annual return.

Cap rates are an important way to screen investments and narrow down a list of investment opportunities which suit your individual preference. Once you’ve decided on which investment opportunity to pursue, you will need to gain a better understanding of the real estate’s location and market conditions to form your investment analysis.

An important aspect here is timing — something which Denzity wants to clarify with ‘cap rate compression’, explained below.

What will we cover in Part 2?

We have just scratched the surface when it comes to cap rates! There are more metrics you should take into account when making an investment decision.

In our next article, we will discuss how you should understand and compare the cap rates of different types of real estate located in different places around the world to decide on which best suits your investment preference.

We at Denzity are here to help you understand the key metrics and provide insights. We hope these articles provide you with insight into the real estate investment process and journey!

If you’re not already signed up with Denzity, make sure to sign up to receive the latest updates!

Equity vs. Debt Crowdfunding, which is right for me?

Investors can participate in Real Estate Crowdfunding in two main ways: Equity Crowdfunding and Debt Crowdfunding.

Equity Crowdfunding means Investors acquire an ownership interest in a real estate project to receive a proportional share of the project’s rental income and capital appreciation. Equity Investors have the potential to achieve high returns (5–15%, for example) but face a large risk should the real estate project not work out.

Debt Crowdfunding means Investors act as a lender to the equity investor of a real estate project and would receive a fixed interest rate (7–10%, for example) generated from the project’s rental income. Debt Investors are limited to the fixed interest rate but repaid interest and principal from the Project’s rental income and sale price before Equity Investors.

It is important Investors understand where they ‘sit’ in the capital stack of a real estate project and how this can affect their investment and return.

Example of Equity vs. Debt in Real Estate Crowdfunding

A Real Estate Crowdfunding Platform acquires an office building (“Project”) for $1,000,000. The Project generates $80,000 in rent, which equates to an 8% cap rate (explained below). The Platform is given three months to perform the necessary due diligence and raise $1,000,000 from real estate crowdfunding investors to close on the Project.

Note: for simplicity, this example assumes (i) rent is equal to ‘net operating income’ (NOI), (ii) no tax is payable on NOI, dividends and capital gains, and (iii) the Platform does not charge any fees to Investors.

Equity v.s. Debt Crowdfunding

Scenario 1: 100% Equity Crowdfunding, with capital appreciation

100 Equity Investors invest $10,000 each to receive 1% equity in the Project. Equity Investors receive a share of the Project’s $80,000 rent in proportion to their fragmented ownership. For example, 1% equity receives $800 in rent.

After 4 years, the Project is sold for $1,100,000 while still generating $80,000 in rent. Equity Investors receive 100% of the Project’s capital appreciation, which is $11,000 per 1% equity ownership.

How did Scenario 1 perform?

Equity Investors with 1% equity achieved a 13% annual return, calculated as:

  • Equity invested: $10,000
  • Rent received: $1,600
  • Equity sold: $11,000
  • Investor return: ($11,000 + $1,600) / $10,000–1 = 26%, which is 13% per year over 2 years

Scenario 2: 50% Equity and 50% Debt Crowdfunding, with capital appreciation

50 Equity Investors invest $10,000 each to receive 1% equity in the Project and 50 Debt Investors lend $10,000 each to receive 7% interest per year. Debt Investors receive no equity ownership. Equity Investors receive a share of the Project’s $80,000 rent only after the Debt Investors are paid their 7% interest.

Each Debt Investor receives $700 in interest, while each Equity Investor receives $900, based on 1% equity ownership. The Platform would make sure all Debt Investors are first paid before paying Equity Investors the remainder of the Project’s rent. This would be calculated as:

  • Project rent: $80,000
  • Debt interest: $35,000, which is 7% on $500,000 lent by 50 Debt Investors equal to $700 each
  • Rent to Equity Investors: $45,000, which is paid to 50 equity Investors equal to $900 each

After 2 years, the Project is sold for $1,100,000 while still generating $80,000 in rent. Equity Investors receive 100% of the Project’s capital appreciation after each Debt Investor is repaid their original amount of $10,000. The Platform repays all 50 Debt Investors their $10,000 each before any Equity Investor receives their proportional share from the sale price, which is $12,000 for 1% equity.

How did Scenario 2 perform?

Debt Investors achieved a 7% annual return, while Equity Investors achieved a 14% annual return based on 1% equity, calculated as:

Scenario 2

Why would you be a Debt Investor instead of an Equity Investor?

In the above example, the office building was purchased for $1,000,000 and sold 4 years later for $1,100,000 while still generating $80,000 in rent. The office building experienced capital appreciation and was sold at a cap rate of 7.3%, calculated as rental income divided by capital value.

The sale at $1,100,000 represents ‘cap rate compression’ which occurs when capital appreciation increases faster than rental income. In this example, the office building was originally purchased for $1,000,000 generating $80,000 in rental income, a cap rate of 8.0%. After 4 years, the office building was sold for $1,100,000 generating $80,000 in rental income, a cap rate of 7.3% or a compression of 70 basis points.

Equity Investors experience 100% of the capital appreciation, which was $100,000 over 4 years. Debt investor receives no interest in capital appreciation as they are only repaid their original investment.

Scenario 3: 50% Equity and 50% Debt Crowdfunding, capital depreciation

Now let’s say the office building was rented to a single tenant and located in an area outside of the city that expecting new developments such as highways, railways, and a regional airport, but the government decided against these new developments. Two things would likely happen that affects the office building’s value:

(1) The existing tenant moves to a different office building closer to where existing infrastructure (highways, railways, airport) attracts small and large businesses. As a result, the office building would lose 100% since it relies on a single tenant. It would need to begin advertising and sourcing for new tenants. During this period, the office building would not be generating rental income to pay the Debt Investors their interest, which could be due on a monthly basis, the implications and mitigating factors of which we will discuss in a subsequent post.

(2) Prospective tenants would likely request a discount on the recent rental price of $80,000, since they may not be willing to be located in an area outside of the city with limited and undeveloped infrastructure. If prospective tenants end up paying $75,000 in rent per year (lower than $80,000), the Debt Investors would still receive their 7% interest per year of $700 each, however Equity Investors would receive lower rent, which drops to $800 (from $900) for 1% equity.

After 4 years, the office building is sold for $900,000 since prospective buyers don’t think the office building’s area will experience new developments in the future and is sold for a cap rate of 8.3%. The office building is sold for less than it was originally purchased for $1,000,000 at a cap rate of 8% with a single tenant paying $80,000 in rental income.

How does Scenario 3 perform?

Debt Investors achieved a 7% annual return, while Equity Investors achieved a 3% annual return based on 1% equity, calculated as:

Scenario 3

In Scenario 3, Equity Investors achieved a lower return than Debt Investors since the office building’s capital value depreciated after 4 years, for the reasons highlighted above. Debt Investors achieved a 7% return in Scenario’s 2 and 3 because their returns are limited, on the upside and downside, to the fixed interest rate of 7%, assuming their principal is repaid.

Equity Investors experienced 100% of the office building’s capital depreciation of $100,000 over 4 years. As a result, Equity Investors achieved a 3% return in Scenario 3, as compared with 14% in Scenario 2, primarily resulting from the office building’s capital depreciation. Equity Investors achieved a positive return since rent received over the 4 years ($3,200) was enough to recover the drop in capital value (-$2,000) — this is referred to as ‘positive carry’.

Investors should decide based on risk vs. return

In conclusion, Investors should decide between Equity vs. Debt Crowdfunding opportunities based on their investment preferences. Debt Crowdfunding is typically a shorter investment horizon while Equity Crowdfunding typically provides greater upside and downside potential for investment returns.

Denzity is built to continuously learn user preferences and interests so that our metasearch algorithm provides you with the most suitable investment opportunities every time users search.

If you’re not already signed up with Denzity, make sure to sign up to receive the latest updates!

What’s up next? Denzity will cover valuation metrics an Investor should consider before making an investment in a Real Estate Crowdfunding project.

Types of Real Estate Investment

Real Estate Crowdfunding provides Investors with the opportunity to invest and receive passive income from various types of real estate located in different parts of the world. Real estate consists mainly of residential, office, retail and shopping malls, industrial and warehousing, and hotels.

Investors should understand the real estate market’s underlying dynamic and outlook before investing in a particular type real estate matching their investment preference. In this article, we highlight the various types of real estate and key considerations before investing in a particular type of real estate.

Why office buildings are the backbone of real estate investment

Office buildings are generally located in cities and towns, the center of economic hubs with retail shops and hotels located in this area as they benefit from pedestrian foot traffic. Office buildings are the core of economic hubs as they provide citizens with jobs, which in turn fuels the economy as employees spend money at retail shops and restaurants.

Office buildings usually have a mix of tenants consisting of small and large companies to ensure stable rental income is generated over a 3 to 5-year time horizon or weighted average lease expiry (WALT), which is explained further in a subsequent post. As a result, rental income is consistently generated each month, even as office tenants move in and out of the office building, which results in what real estate professionals refer to as an occupancy rate.

Office rents are usually the highest among all types of real estate given their central location and function in the economic hub. During periods of economic growth, office buildings can generate high rental income and lead to strong capital appreciation, depending on other factors such as economic condition and supply of office building space in the city.

Office building typically forms the core of a real estate investment portfolio since the investment size is generally larger than others (residential, industrial) with potential for high and stable income generation making it an attractive investment.

Why invest in residential property as a landlord

Residential properties range from a small apartment to large housing complex generally located in close proximity to cities and towns. Residential property is the core type of real estate investment since it provides individuals with accommodation, a fundamental necessity, which makes it easiest to understand from an investment perspective.

Residential properties generally have a single tenant, small house or large housing complex with individual apartments, providing investors with greater accessibility in terms of investment size and tenant management. Single tenant means rental income can be ‘choppy’ as tenants move in and out of different homes, especially as their social behaviors change (e.g. starts a family, needs a larger space).

Residential property located within or close proximity to economic hubs generally carry the greatest value as individuals seek the convenience of a shorter commute to and from their office. Residential properties located close to hospitals and schools is also an important consideration, especially for residential homes suitable for families.

Residential property typically represents the highest yield among its peers in the real estate market. Real Estate Crowdfunding means Investors can obtain fragmented ownership in the residential property while holding other types of real estate.

Why invest in retail with the rising popularity of e-commerce

Retail property range from small shop fronts to large-scale shopping malls. Retail property is generally located within cities and towns to leverage on pedestrian foot traffic paying for products (groceries) and services (hairdressers).

Retail property generally has a single tenant (e.g. hairdresser, restaurant) seeking a shop where similar types of retail businesses are located to capture [like-minded] pedestrian foot traffic. Retail property is important to the makeup of a city or town but faces a key question as a type of real estate investment.

The popularity of online shopping, such as Amazon, questions whether retail property, especially large-scale shopping malls, will survive e-commerce retail. Retail shops located in city centers will attract higher-income consumers, especially tourists, with companies justifying retail rent as (physical) advertising and brand awareness expense alternative to digital marketing.

What the investment rationale is for an industrial property

Industrial property is generally storage warehousing that provides companies with the space to store products sold at retail shops in the city or online. Industrial property is usually located outside of cities and towns as it requires access to transportation networks, such as highways and airports.

Industrial property generally has several tenants sharing sections of a storage warehouse with different access to loading bays for trucking access. Industrial tenants leverage the cheaper cost of real estate in the outskirts since it primarily functions as a storage unit. Rental income generated from the industrial property is usually ‘smoother’ than residential as turnover within the industrial property is lower.

Industrial property benefits from retail consumption of products, whether at retail shops in city centers or through e-commerce. For example:

  • A retail shop located in the city center that sells music instruments would typically store large instruments (pianos, for example) in a warehouse on the outskirts. Once a customer orders a piano, for example, the store would package and deliver from the warehouse to the customer.
  • An e-commerce company selling books online would typically store books in a warehouse on the outskirts and once a customer orders a book, a shipping company would pick up from the warehouse and deliver to the customer.

As you can tell, both retail and e-commerce sales create demand for warehousing storage, whether it be the production or consumption of goods.

How do you invest in a hotel?

Hotel property generally ranges from small (50 rooms) to large hotels (500 rooms) located in cities and towns as temporary accommodation for travelers visiting the particular city or town for two key purposes: business travel and tourism. In addition to the size of the hotel (number of rooms), hotel guests usually seek a particular class of hotel (Holiday Inn vs. Four Seasons) during their stay.

Hotels generally have a single tenant, who manages hotel operations (a Hotel Management Agreement), with various retail shops and restaurants as other tenants within the hotel premises. An investor would enter a Hotel Management Agreement with a service provider and separately manage the retail shop and restaurant tenants, which leverage the capabilities of the hotel service provider.

In general, hotel property investment is considered a ‘trophy asset’ whereby it forms the ‘missing piece’ to complete a real estate investment portfolio. Real Estate Crowdfunding means an Investor could acquire a fragmented ownership in a hotel as part of their portfolio.

What other real estate investments are available

Other types of real estate investors would commonly acquire would be land, agriculture, schools, hospitals, docks, golf courses, to name a few.

Investors require a certain level of expertise in the particular type of ‘other’ real estate, for example, zoning requirements of land, operational needs of a hospital, or topography design of a golf course. This is where Real Estate Crowdfunding Platforms hire real estate professionals to provide relevant expertise, for example analyzing the market dynamics of land that is freehold or leasehold, which is explained further in a subsequent post.

In conclusion, Investors benefit from being able to identify the characteristics of different types of real estate (highlighted above) to make a comparison and decide on which opportunity best matches their investment preferences (size and time horizon of investment).

What’s up next? Denzity will cover the key considerations an Investor should make before making an investment in a Real Estate Crowdfunding project.

Introduction to Real Estate Crowdfunding

Real Estate Crowdfunding provides individuals with the opportunity to invest and receive passive income in real estate, one of the oldest forms of investment that has demonstrated a long history of consistent capital growth.

Crowdfunding in real estate means a number of individuals (“Investors”) combine their money to purchase a real estate property with a Real Estate Crowdfunding Platform (“Platforms”) that hire real estate professionals (“Sponsors”) to achieve the goals of income generation and/or capital growth. Investors have a lot of factors to consider when investing in real estate, let’s walk through step-by-step.

This article’s purpose is to explain the key considerations of Real Estate Crowdfunding so that Denzity users understand how to decide on a Real Estate Crowdfunding investment (“Project”).

How much to invest in Real Estate Crowdfunding?

Investors decide exactly how much they invest into a Project, regardless of the underlying real estate property’s value. Each Investor receives an ownership (in the form of shares) proportional to how much they invest — this is fragmented ownership.

For example, an Investor commits US$50,000 to a Project where the underlying property is valued at US$1,000,000 and generates net income of US$100,000 per year. The Investor’s fragmented ownership is 5% of the Project and would receive US$5,000 in passive income (5% of the property’s US$100,000 net income). In comparison, traditional real estate investment would have required the Investor to commit around US$200,000 and be liable to pay a mortgage payment every month, as a mortgagor.

Where to invest in Real Estate Crowdfunding?

Investors decide which real estate market to invest, usually based on the Platform’s expertise and investment objectives. Each property type (e.g. residential versus hotel versus office) requires specific knowledge held by real estate professionals to match the property’s net income and value with the Investor’s investment objectives.

Investors would typically select a developed real estate market (New York or London, for example) where rent is generated in a commonly held currency (United States dollar, British pound) to generate stable passive income and capital appreciation. In contrast, Investors seeking large capital appreciation would seek an emerging real estate market for long distance real estate investing like Vietnam, for example.

Which type of real estate property to invest in?

Investors decide which type of real estate property to invest and obtain fragmented ownership in a Project, for example, a residential home, office building, or industrial warehouse.* Each real estate property has different characteristics and Investors should decide based on their individual investment preference for risk and return.

*We will talk more in-depth about the various real estate property types in the future.

Which Platform should I invest in Real Estate Crowdfunding?

Platforms will typically be focused on a certain real estate market geography and type of property. As a result, Platforms will hire a team of real estate professionals with specialized knowledge in its focus areas. As an Investor in a Project, the Platform provides you with fragmented ownership but has sole discretion in operating and managing the Project.

Investors should decide whether to proceed with a given Project having made careful consideration of the Platform’s track record and reputation. Denzity provides users with the relevant information to make an informed investment decision on Projects and Platforms.

How long should I invest in a Real Estate Crowdfunding Project?

Each Project will have a different investment (time) horizon. While equity crowdfunding (usually 3–5 years) is typically longer than debt crowdfunding (usually 2–4 years) it can provide a higher return to investors (around 5–15% for equity vs. 7–10% for debt crowdfunding). Based on the investment horizon, Investors can decide how much to invest in any given Project.

In conclusion, each Investor can decide exactly how much to invest in any given Project with consideration to the Platform’s track record and reputation towards achieving passive income and capital appreciation through fragmented ownership in Real Estate Crowdfunding.

What’s up next? Denzity will cover the various types of real estate properties available for investment and highlight the considerations each investor should make before investing.

Stay tuned!

Denzity Team