Have you ever wondered how to take advantage of the real estate market without the risk, or high cost of buying property outright?
Fortunately, crowdfunding has made it possible for everyday investors to reap some of the rewards of the high-stakes RE sector without spending a fortune or taking huge risks.
Real estate investing comprises a massive piece of the economy, alongside other traditional sectors like the stock market.
Until just a few years ago, purchasing shares in a REIT (real estate investment trust) was about the only way for non-direct RE buyers to participate in the market. REITs are a wonderful and profitable way for anyone to get involved in real estate without having to purchase property directly.
Nowadays, investors have a new, exciting avenue for RE investing that allows for healthy profits, low entry cost, and reasonable risk. Real estate crowdfunding is one of the newest opportunities in the RE market. In just the last few years, hundreds of entrepreneurs have created online platforms where ordinary investors can buy small pieces of very large projects.
These platforms for RE crowdfund investors have managed to combine the best of the “crowd” concept with the versatility of Internet financial platforms. Now there’s an entirely new way for anyone with a small amount of money to take part in one of the economy’s most active and rewarding sectors: real estate.
How to Profit in Real Estate Crowdfunding
Like every other type of investing, crowdfunding for RE enthusiasts has its advantages and disadvantages.
The Good News: On the positive side of the ledger, investors with small amounts of capital look at crowdfunding as a unique opportunity. It allows practically anyone to take part in very large and sometimes quite lucrative deals.
Depending on the amount you invest and the size of the project, you might be able to work directly with developers. In some situations, you’ll have much more of a voice in the deal than if you just purchased a share of stock or backed a typical startup.
In the crowdfund RE sector, there are literally thousands of different kinds of real estate deals to choose from.
A Few Disadvantages: Note that there’s a higher risk of developer default with crowdfunding than with standard RE investment. This is a fact of life in the crowdfund marketplace due to the newness and tiny size of many projects.
And as has always been the case in the traditional, direct-purchase RE market, the real estate economy is notoriously fickle, so investors stand to lose their entire stake if the economy goes south.
As it is, the secondary market in crowdfunded RE is so limited, there is almost no liquidity at all, so it’s not always easy to “cash out.”
Crowdfunding as a way of life for the modern investor
Because crowdfunding is still relatively new, compared to all other forms of investing, it has some unique advantages and disadvantages, some of which will change as the market matures. Right now, crowdfund investors have the ability to directly help the economy by creating jobs and stimulating an industry
They also have the chance to invest alongside accredited, high-income individuals who can often “lead the way” toward little-known financial opportunities.
Indeed, one of the most attractive aspects of crowdfunding is that it gives everyone the chance for very large returns on investment, due to the fact that you’re literally getting in on the earliest stages of a company’s growth
In addition, investors enjoy the satisfaction of being able to affect the inner-workings of a small, new company that needs funds
On the downside, investors should not be surprised that, like traditional RE investing, crowdfund opportunities might take many years to show a return on investment
What every investor should know about real estate crowdfunding
Understand the difference between “debt” and “equity” investments: In the crowdfund marketplace, there are literally hundreds of platforms that specialize in different niches. But there are also some broad distinctions that can be highlighted. For example, many platforms offer equity crowdfunding opportunities for investors who want to “own” part of a startup or special business project.
These platforms are typically called “equity crowdfunding websites.” Some, primarily for accredited investors only, also offer “debt crowdfunding,” where the investor is actually making a loan to the entrepreneur, and thus earning interest on the investment in the form of a specific rate. There is no “equity” involved. Think of it as the difference between owning a share of stock or a bond. That share might quadruple in worth if the company takes off, but the bondholders will not get any more or less than the stated interest rate on their instrument.
Most platforms offer both debt and equity opportunities: The huge majority of crowdfunding platforms offer both equity and debt opportunities in real estate ventures. For many reasons, this kind of crowdfunding has exploded in the last year or two. Besides the “reward-based” peer-to-peer lending sites (which are technically considered crowdfund investments), real estate equity crowdfunding is the most popular form of this investment genre as of late 2017.
RE crowdfund investments are backed by assets: There’s a lot of overlap with the terminology, especially because almost all of the real estate platforms are also “equity” investments, meaning that you, as an investor, have a piece of the action. Real estate crowdfund projects have the unique advantage that there is an asset backing up the investment, unlike the situation with 99 percent of startups, in which you might own a “share,” but the company has zero assets.
This is not peer-to-peer (P2P), reward-based investing: Don’t confuse “debt and equity” crowdfunding with peer-to-peer (P2P) lending or other “reward-based” platforms. You can invest in crowdfunding via the P2P portals like Avant, Prosper and others, but when financial experts speak of debt and equity crowdfunding, they usually don’t include those kinds of companies in the definition.
You don’t need to be an “accredited” investor for most platforms: For non-accredited investors, there are some platforms that cater specifically to your needs. It is wise to know that many platforms are quite lax about “enforcing” the rules about what makes you a non-accredited or accredited investor. Most work on the “honor system,” which means that they’ll usually take your word as to which category you belong in.
As of late 2017, non-accredited investors were welcome on WeFunder, SeedInvest, StartEngine, FlashFunders, NextSeed, CrowdBoarders, CrowdFundingSTAR, IndieCrowdFunder, JumpstartMicro, and others. And those are the ones that are already SEC-approved. Many others are in the pipeline for approval, so look for many more to appear soon.
Where to get started: Right now, 12 of the most popular RE crowdfund websites are RealtyMogul, Fundrise, Groundbreaker, CrowdStreet, Groundfloor, iFunding, Crowdbaron, RealCrowd, Realty Shares, Patch of Land, BlackHawk Investments, and American Homeowner Preservation.
Look for real estate crowdfunding to become a more diverse and user-friendly marketplace as the segment matures. Some experts predict that by the year 2020, RE crowdfunding could be one of the biggest stars of the global economy.