Real estate crowdfunding is a way of financing investment in real estate with a limited amount of money from a variety of investors.
From a developer’s point of view, The real estate crowdfunding platform gives builders access to the networks of friends, colleagues as well as family members, and the general public via these social media platforms like LinkedIn, Facebook, and Twitter, as well as other crowdfunding platforms accessible online. This allows real estate developers to expand their possible investors and fund projects that they might have had difficulty financing through traditional channels.
From the perspective of the investor, crowdfunding gives investors a wide range of opportunities for investment and also allows investors to spread their investment dollars into smaller amounts over more investments, allowing them to get a greater degree of diversification.
While real property crowdfunding has been around in various forms for a number of years, it’s recently seen a rise in popularity, mostly due to the growth of online crowdfunding opportunities and platforms.
HOW IS REAL ESTATE CROWDFUNDING ADVANTAGEOUS?
PORTFOLIO DIVERSIFICATION
One of the greatest benefits of crowdfunding for real estate is the possibility to participate in the diversification of your portfolio. When you diversify your portfolio, you’re, in essence, decreasing the risk associated with investing in a single investment by spreading the risk over multiple different investments. If one of your investments fails, your portfolio of investments will be divided among a number of different investments. For example, diversification brings, you can make an investment of $100,000 in investment A. You could then invest the same amount in increments of $20,000 across investments A, B, D, D & E. If you invested only in investment A and that investment failed completely, the loss would be $100,000. However, if you had put the same amount in five different investments, and one of them failed, it would be only $20,000.
ACCESSIBILITY
Participating in real estate investing has become easier with crowdfunding. Private investment in real estate was once restricted to wealthy investors with the money and connections for accessing the investments. With the changes to the law and the emergence of online crowdfunding platforms, these are no longer obstacles to the market. The entry point into the market for real estate investment is much lower than it’s been in the past.
GEOGRAPHIC DIVERSIFICATION
Diversification of portfolios is one of the main benefits when investing in real estate through crowdfunding. And the significant benefit is the ability to gain geographic diversification through your investment. The reason geographical diversification is crucial is that different regions in the market for real estate may be very different in relation to one another.
Although the property market in one location might be thriving, however, the market in a different location might experience a sharp decline. If you put all your money into one area, it’s likely that you’ll get an unfavorable ROI purely due to issues unique to that particular market that do not have an impact on the overall market. If you invest in real estate investments using crowdfunding, it is possible to decide where you will invest.
PASSIVE INVESTMENT VEHICLE
Another advantage to investing in real estate with crowdfunding is that it’s an investment that is a passive instrument, unlike more traditional investment vehicles for real estate that require direct ownership. Those who invest in regular investments in real estate typically must spend a significant amount of period of time in managing property in order to ensure that the property is developed on schedule and meets the specifications and also take on all of the risks. When you invest in real estate with crowdfunded funds, you’re investing in an independent property developer that does the entire work. You can trust that the operator or developer will complete all the necessary work in a timely manner and within budget. Therefore, you won’t have to worry about the stress of managing the building. This means that it allows you to concentrate on your other investment opportunities.
SMALL INVESTMENT SIZE
If you’ve never previously had the opportunity to make a real estate investment due to the size of the money that is usually required to make an investment in real estate, crowdfunding gives you a chance to become an investor in real estate due to the smaller investment needs. In reality, some crowdfunding platforms permit potential investors to invest just $500. It is no longer necessary to be able to afford the tens to hundreds of thousands of dollars that would often be needed to buy an investment property in real property. This lower investment lets you “tip your toe in the water” when you’re a novice to investing in real estate or seeking out more diversification.
HOW IS REAL ESTATE CROWDFUNDING DISADVANTAGEOUS?
LOWER RELATIVE RETURNS
While crowdfunding in real estate is a great option, there are a few negatives you need to be aware of prior to when you invest. One of the potential downsides is that the return you receive will be less than the one you’d receive when investing directly into real estate by owning it. The reason for this is that the operator or developer in which you invest has to earn money also. The investment return usually will reflect this fact. The actual return you receive, however, will be contingent on a variety of factors, including not limiting it to whether it’s a debt or equity-based investment and the final achievement that the investments achieve. If your real property investment is profitable, it is possible to get a return between 8 and 10 percent for credit investing or 18-23 percent for equity investment.
ILLIQUID INVESTMENTS
Another disadvantage to investing through crowdfunding is that the kind of investment is deemed as an investment that is not liquid. They are not able to be sold easily to cash when the demand arises. The buyer must be secured for the property you’ve put your money in, which may take quite a long time and can result in an investment decline in the course of time. If an emergency ever occurs and the property is damaged, it will be almost impossible to get cash out of your investment.
LACK OF CONTROL
If you’re looking to gain control of your investment, then real crowdfunding for real estate may not be a good choice for you. When you invest via crowdfunding, the construction and management of your investment will have to be handled by a different entity. But, other forms of an investment offer investors the capability of managing the project themselves.
If you’ve managed large projects in the past and believe you are able to manage investment in real estate, a traditional form of investment effectively can give you more control over the process of developing and can allow you to achieve the results you want.
HOW TO GET STARTED WITH REAL ESTATE CROWDFUNDING
If you are looking to begin the process of investing in real estate via crowdfunding, you first have to choose an online crowdfunding platform that is, and there are numerous. Every crowdfunding platform has various requirements and specific areas of operation. One of the most important things you must be aware of when selecting among the various platforms for crowdfunding platforms is the minimum amount of investment. While certain platforms offer a minimum investment of $500, other platforms require a minimum investment of $100,000. The typical is about $5,000.
A majority of these platforms allow you the possibility of investing the money in the form of an equity-based investment or an investment in debt. If you invest in equity, you’ll receive an ownership share within the building. Rewards are made through equity shares of the rental revenue or a profit if the property is sold. For debt-based investments, you’ll put your money directly into loans. They are credit facilities are usually secured by the actual property as collateral. They are repayable with interest either on a monthly or quarterly basis, and after that, an amount will be given to every investor.
After you’ve chosen the best platform, you must be aware that every platform operates in a different way. First, you’ll need to create an account, following which you will be able to fund your investment. One platforms like Vairt, an investment of $25,000 will permit the investor to fund different projects and you are allowed to pick from your own. It is possible to get started on the majority of these platforms within minutes. Be aware that the duration of these investments may range anything from a few years to ten years.
THE BOTTOM LINE
While crowdfunding for real estate and investing might not be suitable for everyone however, it could be an excellent way to invest in real estate without having to invest a large sum of money. Spending less money on your investment means that the risk of investing will usually be less. Before you invest in real estate through crowdfunding, it’s essential to know the advantages and disadvantages associated with crowdfunding. With this knowledge, you’ll be able to make a risk assessment of your investment.
