Real estate crowdfunding can pave your entry into what is traditionally the turf of the wealthy. Online platforms make investing in commercial property possible, with lower up-front costs and potentially better returns than the usual options.
This foray into real estate crowdfunding can be financially rewarding when you know what you are getting into. This method is new, different, and subject to due diligence. It’s a must to check the platform itself based on public filings and first-hand reviews from investors to ensure its trustworthiness for your money.
Whether joining crowdfunding sites is worthwhile, read on the pros and cons.
The Good of Real Estate Crowdfunding
Accessible for the Everyday Investor
The Jumpstart Our Business Startups or JOBS Act has paved the way for the proliferation of real estate crowdfunding. Platforms can be open to accredited and nonaccredited investors who can gain access to offerings and start investing right away. These websites are easy to use and typically have mobile apps for checking and monitoring.
Low Minimum Investment
Five thousand dollars ($5,000) can get you started in crowdfunding real estate projects. This low barrier to entry is one of its most attractive features, given the choices on the platform. Sites have varying minimum investment requirements based on the account, investment type, and other terms.
More Choices for Diversification
The median sales price of a house in the fourth quarter of 2020 is $346,800. Imagine having the same amount, or even half of it, to fund deals across property types and real estate markets. These investments are usually structured as the following:
- Debt—You are a lender, and the amount you lent is secured by the property, so it’s less risky. Debt investments offer stable yields based on the interest rate of the loan.
- Equity—You are a shareholder, and your share of the profits is based on the amount you invested. Equity investments can entail higher returns, so do their risks.
Some crowdfunding marketplaces offer real estate investment trust or REIT funds, which can combine financing and equity investments.
Consistent Payouts/Competitive Returns
Generate passive income from your crowdfunding deals through dividends or distributions. These payouts depend on the kind of investment deal, including whether they will be paid annually, quarterly, or monthly.
Returns can be based on rental income, loan interest rate, capital appreciation, and completion or sale of the property, among other events. Such returns may be high based on a case study.
Less Involvement
With crowdfunding, real estate investing is as easy as opening an account. You can earn money from your investments without being a direct property owner, manager, or landlord.
Cons (and Considerations) of Real Estate Crowdfunding
Fees and Costs
While setting up an account with a crowdfunding site is free, actual investing is not. The platform can charge management/broker fees, project fees, and other transaction costs. Aside from the minimum investment amount, consider the payment structure and its effect on the returns.
Longer Commitment Time
As long-term investments, real estate projects have hold periods of two years or longer. That means you can’t access your money right away. Illiquidity is something you have to be comfortable with if you want to proceed with this venture.
Little to No Control
Except for the capital, you have no direct involvement in the project. The sponsor or owner handles the project and must ensure it pushes through completion for investors to get their money’s worth and more.
Uncertainties
Like any investment, real estate crowdfunding has risks. Returns are not guaranteed or the actual may not be as projected. Dividends can be delayed. In light of the possibility of losing money, consider setting limits.
Concerns about Platform/Sponsor
Owing to their roles in the process, choosing platforms or sponsors requires significant attention. How can you be sure that you are dealing with legitimate companies? Are they managed properly so that they won’t collapse? Do they advertise deals that are scrutinized?
It bears repeating that completing due diligence is all the more important. Look up those companies, read what other investors say about their customer service, deal quality, and such.
The Answer
Real estate crowdfunding can expose you to investing in a tech-savvy, less traditional way. Of course, it is not without concerns that require consideration and research.
Arm yourself with knowledge about real estate, investing, crowdfunding, and related concepts.
Also determine if the pros outweigh the cons and align with your investment goals.
With sufficient information, you can decide whether real estate crowdfunding is a good investment for you.