Real estate crowdfunding projects are expensive, to say the least, and hence many people resist their temptation to invest in this field because of a lack of resources. The concept of crowdfunding has given hope to large numbers of individuals aspiring to become successful real estate investors.
However, there are still many people who are either unaware of or do not know about the various methods of crowdfunding to take a plunge into real estate investing.
This article aims to be a perfect guide for such people as it contains crowdfunding tips that are easy, practical, and worth trying to help in the realization of real estate investment goals.
What is real estate crowdfunding?
At the outset, it is important to define the concept of real estate crowdfunding to clear the doubts in the minds of many individuals.
In generalized terms, real estate crowdfunding is a method of making available financing for real estate projects in such a way that large numbers of individuals can invest in them. With the help of crowdfunding, it becomes possible for entrepreneurs to launch large-scale real estate projects without having to rely upon single or multiple lenders.
The amount of money so collected is offered to a group of people who can put in small investments of their own to turn it into a large fund for real estate investment. All investors become stakeholders in the real estate project, and they receive profits in the proportion of their investments.
Traditional methods of real estate investing
If you try to invest in real estate on your own in the traditional manner, you can do it in the following ways.
- Buy a property for cash
- Buy a property through a mortgage
You can then go on to either fix the property and sell it for a profit in the future or use it to earn rental income.
Some individuals invest in real estate investment trust (REIT), a fund that buys residential, commercial, and industrial properties on behalf of its members.
Basic types of real estate crowdfunding
Now that you know that real estate crowdfunding involves pooling the resources of multiple investors to finance a commercial real estate project, it becomes important to understand the types of these projects.
- Equity investment
In such an arrangement, money is collected from various sources and individual investors become stakeholders in the project. If the project involves a rental income property, every single investor owns a certain percentage in the rental income that is generated in proportion to the money he has contributed.
- Debt investment
This is a type of real estate crowdfunding where multiple investors decide to take over the mortgage loan of a commercial property. Once the mortgage has been repaid, it becomes an equity investment.
It is clear from these two types of projects that investors are better off with equity investments as returns in debt investments are limited by the interest that is paid to the lender. However, it should be kept in mind that equity investments are considered riskier by the experts and they also have a long holding period. Debt investors are assured regular payments because of the interest accruing on their money on a quarterly or half-yearly basis.
Invest in High Income Commercial Properties Through Crowdfunding
However, you cannot even dream to buy a commercial property on a large scale because of its prohibitive price tag. After all, you cannot pay the down payment required for financing these mega-projects, leave alone manage their repayments in the future. This is where real estate crowdfunding comes to your rescue.
It makes possible investment in large-scale commercial projects with high returns on investment for small investors. It is the same as mutual funds where you can invest small amounts of money and enjoy investing in blue-chip companies.
Before you start jumping with joy because of this opportunity to invest in commercial property projects, there is a lot you need to learn about real estate crowdfunding.
It is important to keep in mind that the concept of real estate crowdfunding is rather new, having come into existence after the passage of the JOBS Act in 2012. You also need to keep in mind your own investment objectives before deciding to park your money in a long-term real estate investment platform like this.
There are two parties in crowdfunding. First party raises the fund to start or improve a commercial property and the second party is small investors who invest in the hopes of attractive returns on investment. Today, there are many crowdfunding companies with their own methodologies.
As such, for a small investor, it boils down to comparing the terms and conditions of different crowdfunding companies and choosing one that gives a high return on investment and poses little risk.
Benefits of Real Estate Crowdfunding
Real estate crowdfunding not only provides an opportunity to invest in hard assets but also gives a chance to earn high returns on investment.
Most crowdfunding platforms are giving double-digit annual returns to their members and some are beating stock markets by a huge margin on a consistent basis.
Diversification is another reason why many investors choose real estate crowdfunding.
Lastly, real estate crowdfunding is fulfilling the dreams of small investors who are enjoying real estate investing with amounts starting from $1000.
With real estate crowdfunding, there are no restrictions of physical presence as you can even participate online in the case of some platforms.
Disadvantages of Real Estate Crowdfunding
It is a long-term investment strategy. Your money gets locked up for a long period of time.
It is not a liquid investment. This means you cannot cash out in case of an emergency. If you insist on early payment, many real estate crowdfunding platforms charge a penalty from you.
It does not guarantee the safety of your principal. Plus, you may not get desired return on investments.
There are no standards in real estate crowdfunding. Unique features and structural differences in properties mean every deal is different and not comparable to a deal offered by another platform.
Who is Eligible to Invest in Crowdfunding Platforms?
At present most real estate crowdfunding platforms only allow accredited investors to join their companies.
An accredited investor is one who has at least $ 1 million in liquid assets and has an annual income of at least $200000.
However, these are stringent requirements that most middle-income investors do not fulfill. To make sure their platforms can be joined by large numbers of men and women, many companies are changing their rules and allowing even non-accredited investors to become members.
So if you find yourself ineligible now, there is no need to worry as soon all crowdfunding platforms will allow common people to join their companies.
However, experts feel that just because doors of real estate crowdfunding get opened for everyone, it doesn’t mean every investor should jump on to the bandwagon.
These experts feel that an investor needs to diversify his portfolio and he should only invest 15–20% of his money into real estate crowdfunding platforms while keeping money parked in other modes of investing.
This is also because real estate crowdfunding is still in a stage of infancy and not a platform that has been tried and tested for a very long time.
6 Important Real Estate Crowdfunding Investment Tips
- Understand the terms and conditions
As real estate crowdfunding is a long-term investment, it is important for you to learn the rules of this concept before jumping on to the bandwagon.
There is available tons of material on real estate crowdfunding on internet that you should read to become familiar with the important rules of this type of investment.
Two of the most popular types of real estate crowdfunding are equity-based and debt-based. Out of these, debt-based real estate crowdfunding pays money fast but the returns are lower than they are in equity-based real estate crowdfunding.
- Understand the risk involved
There is always this possibility of a commercial property taking more money for its renovation or not selling at the desired profit within the desired time frame.
These things escalate the cost of the project and lower the returns on investment for the investor in a real estate crowdfunding project. If you are not a seasoned investor, it is likely that you might join a real estate crowdfunding platform and get your hopes dashed. If it is a debt crowdfunding project, you may suffer losses when borrowers default on their payments. You must be fully aware of the kind of risks involved with a real estate crowdfunding project before parking your money.
- Do not put all your eggs in one basket
As a small investor, you know your limits. You may be tempted with the anticipated returns on investment, but it is not prudent to put all your eggs in this strategy of real estate investment.
Experts say that the concept of real estate crowdfunding is still in its stage of infancy and so overdoing it may have negative consequences for you as an investor. These experts say that real estate crowdfunding is good for the diversification of your portfolio. However, you should not overdo and restrict the allocation of your funds to this platform for only 10–15% of your portfolio.
- Keep your greed under control
If you have not invested in real estate before, you should know that promise of high returns on investment is always associated with higher risks.
You never know when the housing market stagnates or when interest rates go up. There are many factors affecting the prices of commercial properties and hence it is prudent to keep your greed under control. Do not fall prey to promises of very high returns on investment. Instead, you should choose a platform that promises lower but stable returns on investment.
- Find out more about other investors
You should do your homework when choosing a real estate crowdfunding platform. Once you have zeroed in on the right platform, find out more about investors parking their money in this platform.
You can contact individual investors after obtaining their contact details to reassure yourself about participation by people similar like you. This precaution is necessary as more and more crowdfunding platforms are being taken over by institutional investors these days.
- Keep reviewing each investment decision
You may have confidence in the ability of the managers running the real estate crowdfunding platform, but it is necessary to take a close look at individual projects. By reviewing investments, you can decide whether you should continue with the given real estate crowdfunding platform or not.
Know the Lock-in Period as well as Liquidity
Every single project in a real estate crowdfunding platform is unique and different from another. Therefore, it is important to keep in mind the liquidity schedule of a particular transaction. You should also enquire about the lock-in period before which you cannot get your money back.
If you compare traditional real estate investing with real estate crowdfunding, you find that the latter is far more beneficial and allows you to reap the rewards without doing any hard work.
On the other hand, you must work hard hopping from one property to another trying to fix things and to solve the problems of your tenants. You can rest assured of a good return on your investment in a real estate crowdfunding project because the stakes are high, and the platform is managed professionally by developers.
Also, there are always parties involved with a real estate crowdfunding platform who have vested interests in it. Yes, you can invest in 5 different properties by paying a down payment if you have $100000 in your bank account. But the kind of time and effort you must spend in managing these 5 properties is so high that you will find real estate crowdfunding a child’s play in comparison.