Real estate crowdfunding isn’t just the newest buzz-worthy trend in the space. It’s one of the most exciting ways investors can raise capital, invest in real estate, or simply diversify a portfolio. If you’re new to the concept of crowdfunding, you likely have questions, such as:
- What is real estate crowdfunding?
- Are there different types?
- What are its benefits?
- Are there any disadvantages of crowdfunding real estate?
Crowdfunding, while it’s not a traditional fundraising method, is a powerful way to finance your real estate endeavors. In fact, the real estate crowdfunding industry was valued at $1 billion in 2017 and is expected to grow to nearly $87 billion by 2025.
What is Real Estate Crowdfunding?
Basically, crowdfunding in real estate involves raising the money you need for investments by enlisting several small contributions from a large investor pool rather than asking just one or two investors for a large, lump-sum investment.
Another key difference between crowdfunding and traditional capital-raising methods is where the transactions occur. While traditional methods usually involve in-person meetings and transactions, crowdfunding is normally done via an online crowdfunding platform.
As crowdfunding continues to become a more acceptable funding alternative, more people are using these platforms to reach accredited groups of investors. Even small business owners launch campaigns to fund smaller investments.
Types of Crowdfunding
Real estate investing is a great way to grow long-term, sustainable wealth and bulk up your net worth, perhaps even more so than playing the stock market. If you’re an investor with a bit of capital already built, familiarize yourself with the two main types of real estate crowdfunding: Equity and Debt.
Equity Investments
This is the route most investors choose simply because it allows for greater returns than debt investments. That said, there’s also a bit more risk involved. An equity investment gives all investors a stake in the property, essentially transforming them into shareholders.
When you choose this investment strategy, they base returns on the property’s total rental income less any fees charged by the platform. If they ever sell the property, each investor would also earn a slice of the property’s appreciation value. Depending on the crowdsourcing platform, payouts typically get sent at the end of every quarter.
Equity investment benefits include:
- Unlimited returns and could lead to substantial annual income
- Lower fees
- Considerable tax breaks or benefits
Equity investment cons include:
- Riskier investments
- The hold period is longer
Debt Investments
On the flip side, debt investments make you a lender of sorts for the owner of the property. You receive fixed returns based on the mortgage loan’s interest rate and for the amount you invested. All of that sounds like a pretty good real estate investment opportunity.
Depending on the real estate investment platforms you use, you’ll either receive monthly or quarterly payouts. Also, since you’re investing in the property’s debt, if the property is sold, your investment payout is given priority.
Debt investment pros include:
- Steadier returns
- Less risky
- Shorter hold times
Debt investing cons include:
- Much higher fees in some cases
- Capped annual returns
Overall Real Estate Crowdfunding Benefits
It doesn’t matter if you’re at the very beginning of your real estate investment journey or you’re a pro in the industry, it can often be difficult to come up with the right financing strategy. Since crowdfunding merged with the real estate industry, a lot of savvy investors have used this fundraising method to score deals. Aside from the benefits noted above, real estate crowdfunding has a host of additional, notable benefits, such as:
- Increased funding options
- Widening your network of investors
- Direct marketing doubles as a marketing tool for your real estate business
- Commercial real estate investment success creates a positive word-of-mouth buzz
- Leads to increased client loyalty
- Platforms are user-friendly and save you time and money
- Provides access to peer feedback
Because crowdfunding is such a public-facing venture, you’re putting yourself and your agency “out there” for potential criticism, whether you’ve asked for advice or not. However, this is a great way to take some information to heart—not everyone on the internet is out to break your spirit. In fact, most critics aim to help you identify and fix flaws in your investment strategy.
Real estate crowdfunding platforms have a little bit of a learning curve. When you launch your initial campaign, the feedback you get from other real estate investors can help you increase the success of your future campaigns.
Drawbacks of Real Estate Crowdfunding
As attractive as this strategy is, it might not be for everyone. It’s important to understand there are some disadvantages to real estate crowdfunding, such as:
- Uncertainty—There’s always the chance you could lose out, and while you may be entirely confident of your deal’s success, it may take a bit more convincing before other investors will join you.
- Return rate—The most common crowdfunding deals have investment periods of up to five or more years. Don’t expect immediate returns.
- Lack of control—This is perhaps the worst drawback of real estate crowdfunding investments overall. Just because you invest, it doesn’t mean you have decision-making power over the property you invest in. So, to really get other investors on board with your deal, they must feel completely confident in your ability to choose real estate deals wisely and know that you’ve done your due diligence.
Real Estate Crowdfunding – Wrapping Up
Because it’s such a simple way to source funding for investment properties, investing in crowdfunding is likely to continue rising in popularity. When used correctly, real estate crowdfunding sites are a win/win for equity and debt investors, and those looking for funding. As you begin to research into the various crowdfunding platforms, follow good practices and do your due diligence when investing.
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