Is Real Estate Crowdfunding Right for You?
Crowdfunding may seem like a new concept, but in truth the practice has been around for many, many years. In a sense, the war bonds that the United States government issued in 1917 and 1918 to finance military operations during World War I were a form of crowdfunding. The Statue of Liberty stands on a granite pedestal that was partially paid for with dollars raised from a crowdfunding campaign. And think of all the family members that have pooled their money to buy property together.
The difference between historical crowdfunding and the practice today is modern technology. Numerous online platforms present a range of investment opportunities, and there are several for those interested in investing in real estate. Crowdfunding for real estate has opened a world of potential for real estate owners and developers and investors that might not otherwise have been able to do business with one another. Of course, as with any kind of investment, real estate crowdfunding requires research and due diligence for a full understanding of where your money is going. Read on for some important information that could help you decide if crowdfunding is right for you.
So What Exactly Is Real Estate Crowdfunding?
An online platform for real estate crowdfunding connects real estate owners and developers–looking to raise money for projects–with investors. In many cases, individual investors are able to get in on a project for a minimal amount. They can also diversify their real estate holdings among a variety of properties including office buildings, apartments, retail shopping centers and other types of commercial properties. Many investors prefer real estate crowdfunding because they can enjoy the benefits of owning income-producing property without the responsibility of managing it themselves.
Is There a Difference Between Real Estate Crowdfunding and REITs?
Yes. A REIT—Real Estate Investment Trust—is an entity that owns and manages a portfolio of income producing properties. When you invest in a REIT, you are investing in the entity (usually a corporation) that in turn invests your money in real estate. A REIT can be public and traded on an exchange or private.
With real estate crowdfunding, you are usually investing in an entity that invests in specific commercial real estate properties. As with a REIT, your money is pooled with that of other investors. However, you choose the specific projects that you want to invest in, rather than leave that decision up to someone else.
What Types of Investments Does Real Estate Crowdfunding Offer?
There are primarily two types of real estate crowdfunding: equity and debt. With equity crowdfunding, investors own a share of the property, receive cash flow from rent and get a cut of the profits if the property is sold.
Debt crowdfunding is similar to a bank making a mortgage loan. Investors own a share of those loans and thus have a reliable monthly income stream, but they don’t get a share of profits at the time of sale, because they are invested in the debt and not an actual property.
What Are the Advantages of Crowdfunding for Real Estate?
Affordability. Crowdfunding, whether for real estate or any other type of business venture, gives many people the opportunity to invest. Ordinarily, purchasing property can cost hundreds of thousands if not millions of dollars. Depending on the crowdfunding platform and the type of real estate, the minimum investment could be as low as $1,000 to $5,000. Certain crowdfunding sponsors, including Henry S. Miller, restrict their investors to those that qualify as an “accredited investor,” which means they must have a certain minimum net worth (exclusive of the value of their primary residence) or minimum annual net income as set forth in Regulation D of the Securities Act of 1933.
Diversification. Because investors are able to choose the type of projects they want to invest in, they are able to build a diversified portfolio of different classifications of real estate as well as geographic locations.
Access to Information. A reputable sponsor provides investors with all the details about a vetted project before they invest their money. Once you invest, the crowdfunding site should report on how your investment is doing. Moreover, information that was previously available only to professional property investors is now accessible to the public thanks to the Internet. Anyone can do research in order to learn about market trends, a sponsor’s background and new properties that are looking for capital.
What Are the Disadvantages of Real Estate Crowdfunding?
Illiquidity. Real estate crowdfunding is typically illiquid, so you will likely not be able to cash out of an investment before the property is sold.
Lack of Control. After you choose a property for investment, decision-making is in someone else’s hands. You will be a passive investor, so if you prefer to have a voice in how the property is managed, then crowdfunding may not be the model for you.
Capital Calls. Real estate projects are complicated. Consequently, more capital may be required than originally anticipated. In that case, the project manager may issue a capital call, asking investors for more money. Be aware of this possibility before you invest.
Loss of Capital. As with any investment, there is a risk of losing your capital. No project comes with a money-back guarantee.
Crowdfunding can be ideal for someone that wants to try investing in real estate. You can test the market without having to come up with a lot of money for a big purchase. Carefully consider the pros and cons of real estate crowdfunding, know your style as an investor, and you may be able to benefit from this growing trend.