Crowdfunding and Real Estate: What You Need to Know
Crowdfunding for investment properties may not be a brand new concept, but I’ll admit it’s relatively new to me. But I’ve been hearing a lot more about it in the news and on social media lately, so I’d thought I’d better investigate. And since I’m sure I’m not the only one who’s wondering what exactly “crowdfunding” means as it pertains to real estate, I’m going to share with you what I found out!
What is Crowdfunding?
First, crowdfunding works exactly like it sounds. A whole bunch of people pool their money together to buy something. For a relatively small amount of money, the investor gets a stake in whatever is being purchased or funded. You see it in a lot of areas, like tech startups and community-oriented projects, and even health care. Several years ago, this form of money-raising made its way into the real estate sector as well, and now we’re seeing crowdfunding opportunities all over the place.
It works a little bit like a REIT (real estate investment trust), but there are some notable differences. One is that with REITs, the investor has no control over what their money is being used for, whereas with crowdfunding, investors can pick and choose which properties or developments they want a stake in. Another big difference is the buy-in cost. REITs are usually very expensive to get into, not to mention one of the more complicated investment vehicles, which is why the average investor usually steers clear.
And that’s what makes crowdfunded real estate much more appealing to the average investor. It’s far less complicated, there’s a lower buy-in cost, and investors have the freedom to pick and choose which properties they want in on. Be aware, however, that $500 and a wish to invest in real estate isn’t going to get you in on a sweet crowdfunded deal. You do need to have some cash laid aside ($5,000 is about the minimum), and you have to be an accredited investor according to SEC standards before you can start participating.
Pros and Cons
So now that we know a little more about what crowdfunded real estate is, let’s summarize the pros and cons:
- Lower buy-in cost
- Control over what properties you invest in
- Huge variety of properties and projects to pursue
- Don’t have to deal with the hassles of sole ownership of an investment property
- Normal real estate investment risks…if the market implodes, you’ll lose money
- Lack of liquidity, even more so than a traditional property investment as you cannot sell your stake as easily as you might be able to a sell a traditionally-purchased property
- Risk of default on larger development projects is higher
- Must be SEC accredited investor
Choosing a Crowdfunding Firm
If you think all this sounds pretty good and you want to get in on some crowdfunded real estate, awesome! But before you pull the trigger, you have to consider which crowdfunding firm you want to use. You’ll find a number to choose from, but I would caution you to really put in your due diligence in selecting one. Go with one who has experience and a clean reputation, as well as solid financial resources and backing. It’s also a good idea to work with a firm who acknowledges the risks that are present, instead of focusing solely on any potential reward. You need a firm who’s grounded in reality, and bonus points is they’re willing to educate you on this form of investing as you go along. This can be really helpful if you’re new to crowdfunding and still trying to figure out what to expect.