What is Real Estate Crowdfunding?

It has never been strange to have an idea or
business plan but no financial capacity to execute these plans. In the past,
people almost always turned to loans and grants. But as things continually
change, better ways of getting funding come to light. A great example is
crowdfunding.

Crowdfunding is not a new word. A lot of
people are familiar with crowdfunding and what it represents. In simple terms,
it is literally getting a crowd (several people) to fund your business plan,
project, idea, and so on.

So what does this mean for real estate? Yes,
real estate is a whole different thing altogether and ideally, crowdfunding and
real estate should not mix. But, they have and so far it is going better than
anyone expected. If you are wondering what exactly real estate crowdfunding is,
the answers are presented below.

What
is Real Estate Crowdfunding?

Real estate crowdfunding is an investment
method in which crowdfunding is used to raise capital for real estate
investments. Funds from multiple investors are pooled together allowing
investors to invest in a variety of properties without the hassle of mortgage
brokers, contractors, and so on. It presents a win-win situation for everyone
involved.

Real estate crowdfunding is operated online.
The benefits involved are vast and include the following:

  • Flexible access to funds/capital
  • A solid way to grow your investor network
  • Increasing credibility and growing your
    reputation.
  • Consistent results help to build investor
    loyalty.
  • Several user-friendly platforms to choose
    from.
  • Gain valuable feedback.

With so many benefits, it’s easy to consider
diving headfirst into this investment option. Let’s not forget that with
everything that has an advantage, comes disadvantages too. The cons involved
with real estate crowdfunding are a few thankfully.

  • The investment risks with real estate
    crowdfunding are the same as for any other real estate investor. This means
    that if the investment fails, the investor still loses money.
  • There is also a higher risk of defaulting
    real estate developers.
  • There is no liquidity.

Types
of Real Estate Crowdfunding.

As an investor who is looking to gain the
benefits of real estate crowdfunding, there are two major types to choose from.
These are explained below.

  • Equity
    Investments

Equity investment is the most favored real
estate crowdfunding option by investors. The reason for this is the higher
returns it provides than its counterpart, debt investment. How this type
of investment works is, you are essentially a part-owner of the property.

In equity investments you the investor will
have an equity stake in the commercial or residential property, making you a
shareholder. The returns on this sort of investment is in the form of
rental income. The payouts can be monthly or quarterly. This depends on if you
go for preferred equity or common equity, respectively. Only a thin line separates
these two. If they also sell the property, you get part of the new value.

Equity investments are highly beneficial.
Here are the pros and cons associated with it.

Pros

  • Returns can go really high depending on
    all the factors involved.
  • Paying taxes becomes easier and
    cost-effective.
  • You equally enjoy lower fees and flexibility
    as payments can be annually rather than monthly.

Cons

  • A higher risk than any other type
    of real estate crowdfunding investment.
  • There is a longer holding period of sometimes
    up to 10 years that limits liquidity.
  • Debt
    Investments

Debt investment is exactly what it sounds
like. The investor lends an amount to the property owner and thus becomes the
recipient of a fixed return based on the amount invested and the owner’s
mortgage loan. So you can already see how this plays out in terms of benefits.
The payouts can be monthly or quarterly, but the investor is assured of being a
priority during payouts.

Pros

  • There is clearly less risk involved. If
    anything goes south, you can take foreclosure action to recover your loss.
  • There is a shorter holding time with debt
    investments. The highest holding time is often as short as 24 months.
  • You get to enjoy steady returns as much as 8
    to 12 percent annually.

Cons

  • You pay higher fees to the crowdfunding
    platform you use with the debt investment method.
  • Your yields are both fixed and limited
    compared to equity investments because they are based on the interest rate of the
    owner’s mortgage loan.

How
Real Estate Crowdfunding Platforms Work

There is a myriad of options when it comes to
real estate crowdfunding platforms and it is easy to get lost not knowing who
or which to choose. Crowdfunding is based on pooling funds from various
investors this is the primary concept all platforms operate with. However, each
platform is different in how they do this.

When choosing a real estate crowdfunding
platform, it is important to consider the following tips:

  • Choose a platform that has experience in the
    type of real estate crowdfunding investment you want to engage in.
  • Choose a platform that acts as a
    broker-dealer.
  • Credibility is vital for the platform you
    use.
  • The platform should have a solid venture
    capital backing.
  • Inquire about all the details involved such
    as documentation needed, possible liabilities or indemnities to investors,
    and so on.
  • Quality customer service.

Popular
Real Estate Crowdfunding Platforms/Sites

  • Crowdestate
    – Great
    for starters with investment amounts for as low as €100.
  • RealtyShares – With
    a minimum of €5000 investors get to look at pre-screened properties.
  • Prodigy Network – Ideal for
    commercial real estate investment with a minimum of €10  000.
  • RealtyMogul – Minimum
    investment amount of €1000 and open to both accredited and non-accredited
    investors.

Final
Thoughts

By all indications, real estate crowdfunding
is a great way to invest and get returns or get capital for your projects.
However, being an investment with risks regardless, it’s not advisable to throw
in your entire life savings. You can reduce the risks involved by exercising
proper precautions starting with the platforms you choose and the projects you
proceed to invest in.

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