Should you invest in real estate crowdfunding?

Real estate is expensive. And commercial real estate? not to worry.

But the truth is, you can invest in a quality real estate project for as little as $100 and not even have to unclog your tenant’s toilet at 2am on Saturday.

How? Crowdfunding.

Real estate crowdfunding has exploded onto the investment scene, giving ordinary investors access to commercial real estate deals that were previously available only to the wealthy (and well-connected). .

But what exactly is real estate crowdfunding and how does it work, and what are the pros and cons of crowdfunding real estate investments?

What is real estate crowdfunding?

Real estate crowdfunding allows investors to invest in commercial real estate projects with a (relatively) small investment. The funds are pooled to invest in larger real estate projects and pay dividends to investors on a regular basis.

sauce: Giphy.com

The idea of ​​crowdfunding is not new (is there such a thing as Kickstarter?), but until recently it was not available to individual investors.However Jumpstart Our Business Startup Act It went into effect in 2016 and for the first time allowed “non-accredited” investors to back privately held companies.

Prior to that, investors had to be “certified” to invest in privately held companies. That meant you had to have a net worth of at least $1 million (excluding your primary residence) or have earned at least $200,000 over the course of at least two years.

Most crowdfunding real estate platforms offer a wide range of deals in the marketplace, user-friendly dashboards, and an easy onboarding process that allows investors to start investing in commercial real estate deals right away.

How real estate crowdfunding works

Real estate crowdfunding is a method of raising money for commercial real estate projects. This includes various investments such as:

  • Commercial facility
  • apartment
  • Adult care facility
  • housing complex
  • farmland
  • or other property holdings

There are typically two types of investments available for crowdfunded real estate:

  • stockYou can invest in shares of real estate projects and get a partial stake in your investment. Equity investments typically pay quarterly dividends from rent collection and other income-generating activities.
  • debtA debt investment is typically a loan to the owner of a commercial investment project that pays monthly interest to the investor in the form of dividends.

read more: What is a dividend?

Real estate crowdfunding site

Real estate crowdfunding is typically done through platforms that offer investments in commercial real estate deals through the marketplace.Some examples you may have heard are crowd street, fundraiserWhen controversial.

These real estate crowdfunding sites allow you to easily browse upcoming investment opportunities as well as view details for each project, including minimum investment amount, transaction timeline, and expected return.

read more: Best real estate crowdfunding site

Websites typically manage relationships with project owners, also known as “sponsors,” and charge a platform fee for all investments.

Sponsors are also given a portion of the proceeds from the project as they manage the project, including improvements, operations, and dealings with contractors and property management companies.

Accredited and non-accredited investors

An accredited investor is defined by the U.S. Securities and Exchange Commission (SEC) as having an annual income of at least $200,000 (or $300,000 combined with a spouse) or a net worth of $1 million (or more) outside of the principal residence. or greater).

Even though crowdfunding has taken the market by storm, some crowdfunding sites require you to be an accredited investor in order to invest in individual deals.

Non-accredited investors, on the other hand, simply do not meet the qualifications and have some restrictions on crowdfunding investments.

  • Investors with income or net worth of less than $124,000 may only invest up to 5% of that number (or $2,500) annually.
  • Investors with income or net worth greater than $124,000 may only invest up to 10% of that number, up to $124,000 annually.

read more: How to become an Accredited Investor

Advantages and disadvantages of real estate crowdfunding

Real estate is a proven investment that offers great returns, but like any investment, it always comes with risks. Crowdfunded real estate has offered retail investors a new asset class, but it’s not for everyone.

Strong Points

  • high return potential
  • Pay dividends regularly (unearned income)
  • Professionally Scrutinized Real Estate Transactions
  • Access to commercial real estate with a low minimum investment
  • No landlord or property management headaches
  • How to diversify your investments across different asset classes

Cons

  • An illiquid investment due to years of inability to access funds
  • Due diligence is still required — you need to understand your investment before you invest
  • Platform fees, sponsorship fees, and other fees may reduce your earnings
  • Paying dividends means you may pay more taxes
  • Some platforms still require certification to access individual trades

Should You Invest in Real Estate Crowdfunding?

Real estate crowdfunding offers an easy way to earn attractive returns on a small investment. However, it is important to keep in mind that investing in real estate is inherently risky and crowdfunding is no exception.

sauce: Giphy.com

Real estate crowdfunding may not be the kind of investment that will throw away a significant percentage of your life savings and assets. You can also consider it as part of

read more: Is real estate passive income?

As always, it’s important to do your own research to fully understand which investments to add to your portfolio. Real estate crowdfunding requires you to dive into the details of the deal you are looking to invest in. This may include reading finance. Statements and learning about the markets in which you invest.

We recommend that you consult with a licensed financial professional to see how the property fits into your overall portfolio and help you meet your short-term and long-term goals.

read more: How to choose the best financial advisor for you

How to start real estate crowdfunding

To get started, you can sign up for free on our crowdfunding platform. Most sites require you to complete an application form (such as signing up for a bank account) and some require you to verify your accredited investor status (currently most platforms are not accredited). corresponding to investors).

You can then browse the marketplace to find public deals to invest in. You can choose your trades, complete the application, and then transfer your funds to the platform for investment. Some platforms may offer conference calls with deal sponsors to ask relevant questions. Some platforms offer portfolio management services for investors who invest heavily in their platforms.

In addition to investing in individual deals, many platforms offer real estate investment trusts (REITs) that invest in multiple projects at once, creating a diversified property holding in a single investment. In contrast to listed REITs, these investments have no market to trade and are considered illiquid investments.

read more: How to invest in REITs

Things to consider before investing

So the crowdfunded real estate idea was exciting and ready to get involved.

Before you put your money into any of these platforms, there are a few things to consider.

  • comparisonBe sure to check a few different sites as rates, minimums and deal terms all vary. Find the one that fits your investment requirements.
  • budgetIt is important to know how much money you can (and are willing to) invest before choosing to trade. Some deal minimums are high (e.g. $25,000), so make sure you know how much you can invest before you start.
  • know the timelineMost crowdfunded real estate deals have long timelines, locking funds for years at a time. Make sure you don’t need the invested funds until the investment has matured.
  • reviewMost platforms offer access to commercial real estate, but there are many different types. Always check your preferred assets before choosing a platform and investing.
  • ConsultAgain, it’s important to understand how real estate crowdfunding fits into the larger financial situation in your life. Consulting a financial expert can help you choose the right investments, avoid tax mistakes, and diversify your entire portfolio so you can focus on your goals.

read more: Important advice to help you start investing

Conclusion

While crowdfunded real estate is still a fairly new concept for investors, it has grown into a solid asset class over the last few years. With a growing number of quality platforms, a growing variety of assets to invest in, and a track record of solid returns, it can be a great way to diversify (and enhance) your portfolio.

However, real estate investing is risky and you can lose real money even through crowdfunding platforms. Although rare, there have been cases of crowdfunding real estate investments where the investor has lost all of their money. This can be mitigated somewhat by investing in his REIT fund, which invests in multiple projects, but there is always the risk of loss.

If you’re looking to diversify your portfolio into long-term, high-performing asset classes and don’t mind long-term investments, crowdfunded real estate is a great option.

Featured Image: want and do/Shutterstock.com

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