Crowdfunding is more than just a buzzword of the 21st century; it’s a fresh, innovative way of raising capital for real estate investors. Yet how does crowdfunding work on immovables? Which are the advantages of real-estate crowdfunding deals? What do you need to know about the search for real estate investment loans from crowds? What returns would you get by investing in a crowdfunding project by another investor?
Although real estate crowdfunding is not a conventional means of capital raising, investors need to understand this effective method of real estate financing.
What Is Crowdfunding for Real Estate?
Crowdfunding is a way to raise funds for business owners, not by asking one person to make a big investment, but by reaching out to a wide pool of investors who each contribute a small amount of money. The main difference between crowdfunding and more conventional methods of raising funds, as crowdfunding is typically done online, is in the medium used.
Company owners, along with crowdfunding websites, switch to social media outlets like Facebook or Twitter to directly market their projects to broader communities of potential investors.
Real estate investors have opted for crowdfunding as an alternative to more conventional investment financing. Large developers, for example, use crowdfunding platforms to solicit contributions from approved investor groups, while small business owners have initiated campaigns to raise funds for smaller investment deals. The section below explains why in recent years, real estate crowdfunding has become increasingly popular among investors.
Benefits of Real Estate Crowdfunding
If you’re just starting your real estate investment journey, or you’re a seasoned pro, it can be a challenge to lock down the financing needed to finance a deal. With its introduction into the real estate market, many developers have used crowdfunding as an innovative way to finance their deals. Additionally, crowdfunding has been related to many other notable benefits, including:
- Crowdfunding real estate enlarges your funding choices as your network of investors expands.
- Direct marketing through crowdfunding also doubles as an instrument for promoting your company.
- Good ventures will ultimately lead to positive word of mouth and consumer loyalty.
- Through using a user-friendly investment platform, you can save time and money.
- Gain access to valuable input from your online audience so that any company deficiencies can be addressed.
Quick Access to Financing
Crowdfunding offers convenient access to credit and resources without the hassle of securing a loan and is used for almost any kind of fundraising effort you might think of: personal, family, business and real estate investment. Investors may benefit from crowdfunding real estate by keeping their personal equity free and usable for other purposes, while keeping their personal credit scores intact. This allows small business owners to get their businesses up and running quicker, and can help secure funding for deals when more conventional options are limited.
Superb Marketing Tool
In addition to the direct gain of funding, crowdfunding is an excellent marketing tool for company owners wishing to promote their brand. By supporting fundraising campaigns via social media and directly on crowdfunding platforms, real estate investors have the opportunity to expand their network of investors quickly. A best practice is to provide your website with a credibility package, showing past projects and returns along with the purpose and goals of your business. This helps show potential investors your integrity and professionalism.
Create Loyalty to Investors
A crowdfunding campaign is a smart way of proving an idea or the project’s appeal and financial viability. You will draw potential investors and gain support by presenting persuasive information through the campaigning process. If your support has been secured, your donors will be confident in your success and will go the extra mile to help you succeed. Your customers can build a sense of loyalty by producing consistent results, which can lead to successful word-of-mouth marketing, recurring sales and direct referrals.
User-Friendly Platforms at Your Disposal
Many crowdfunding real estate platforms make it easy for investors to start their fundraising campaigns and thus save them time and money. These platforms are designed to visually appealingly highlight campaigns, thus allowing fundraisers to reach a wide audience without undue effort. Be sure to keep reading to explore some of today’s best available crowdfunding sites for real estate.
An Option for Getting Positive Reviews
Campaigns will be subject to responses, with or without invitation, despite the public nature of crowdfunding. It is, however, a perfect opportunity for company owners to track input from users and receive valuable feedback. Pay attention, for example, to feedback left by other seasoned investors, or even critique as a way of finding and correcting business flaws. Responding and thanking users for taking the time to reach out will help you open communication lines and establish real ties with new contacts.
Additionally, it is important to note that those who have not yet engaged in crowdfunding have a learning curve. Some of the feedback can be a perfect way to learn how to improve your campaigns in the future when you start your first campaign. This may also be an way to introduce those who are not yet acquainted with the idea of crowdfunding.
We have explored the idea of crowdfunding through a borrower’s lens up until this point. Now let’s presume you’re an investor in real estate that has built up some money, and now you’re searching for ways to expand your wealth a little more passively. Real estate crowdfunding generally has two choices for this form of investor: equity investments and debt investing.
Investing in Equity: Pros & Cons
This is the path most investors in real estate crowdfunding take, mainly because it offers a higher return than debt investment. That also poses danger, though. Equity investments provide investors with an equity interest in a residential or commercial property, making them shareholders in turn.
If you want to invest this way, the return would be based on the property’s rental income, minus fees paid for the crowdsourcing platform. You’ll also receive a percentage of the appreciation value in the event the property is sold. Commonly, payouts are sent every quarter.
- The Sky is the limit on returns: You will see (at times) an annual return of 18 to 25 percent, with the chance of more, because equity investments have no limits on them.
- Lower fees: You have the option to pay an annual charge, instead of upfront payments and monthly fees, to hold your shares on the property.
- Tax benefits: Because you own a share of the property, you can subtract expenses thereon from the annual income tax (e.g. depreciation, repair).
The losses include:
- Riskier: For payouts you’ll be second in line. If the property fails to make a profit, you won’t get any return on your investment.
- Longer holding period: If you want more liquidity in your portfolio, investing in equity is obviously not for you. The retention period usually lasts 5 to 10 years.
Debt Investments: Pros & Cons
Debt lending, on the other hand, means the borrower (you) are basically the lender to the owners of the land. You’re getting a set return based on the owner’s mortgage loan, as well as the amount you’ve invested.
Payments are typically made monthly, or quarterly. And because you’re investing in loans, during property payout you’ll be given priority.
- Steady returns: Due to how the investment is organized, you’re more able to foresee how much and when you’ll collect your payout. You could be looking at an annual return opportunity of 8 to 12 percent.
- Less risk: With debt investments you have less risk, because the property owner would be the one to secure the mortgage loan. When the owner refuses to pay the loan, a foreclosure action would allow you to recover your loss.
- Shorter holding time: Considering that debt investments are typically made for construction programs, holding time only ranges from six to 24 months.
The losses include:
- Higher fees: The crowdfunding platform can take up a percentage off of your payout once you decide to invest.
- Capped returns: Mortgage contributions are based on the owner’s home loan interest rate. As such, you’ll have limited yields.
Best Crowdfunding Platforms in Real Estate
With a plethora of crowdfunding sites available, it’s easy to get lost in a sea of options and features. It is recommended that you choose a platform based on site accessibility, reputation, documentation, and customer service efficiency. For example, you want to stay away from places that act as nothing more than listing services. Go for broker-dealering sites. Additionally, try to pick a platform that has prior experience managing the kind of investments you ‘re looking for.
First, you’ll want to search for a platform with solid venture capital funding. Since your investment could be locked up for a certain amount of time, make sure you are using a reliable platform that will be up and running for a long time. Additionally audit how the site does its due diligence. Make sure you ask the relevant questions: What kind of documentation does the platform obtain for possible deals? Will they expect businesses to provide liabilities or indemnities to investors, should something bad happen?
Finally, ensure the platform provides reliable customer support. When
you ‘re exploring various channels and ask them your collection of questions, you will be able to get a sense of their customer service satisfaction from their ability to offer the knowledge and support that you need.
Now that you’ve got a guide on crowdfunding for real estate deals, you may be thinking which real estate crowdfunding platform you should go with. Here are a couple to consider:
- RealtyShares: RealtyShares is a tech-enabled platform with a minimum requirement of only $5,000 which enables borrowers to present their projects to accredited investors. At the other hand, investors can look at a market of pre-screened residential, industrial, retail, and mixed-use properties.
- RealtyMogul: RealtyMogul also offers a minimum investment of $5,000 to cater for both debt and equity investors. They are putting investor security at the top of their priorities, ensuring that all investment opportunities are evaluated.
- iFunding: You may want to check out iFunding if you are looking to invest in commercial retail and single family residential ventures. The website has professionals for lending a hand to raise money for a project. Minimum contribution is $5,000.
- Patch of Land: This is a peer-to-real-state lending platform that serves as a bridge between investors seeking high-yield, short-term investment, and borrowers seeking recovery funding.
- Fundrise: Fundrise serves as an online exchange selling certain investments for as little as $5,000. Fundrise has linked countless property owners with real estate investors since its inception in 2012.
- Prodigy Network: Prodigy Network is a perfect choice for those looking to become interested in commercial real estate. The minimum investment is $10,000, but their comprehensive six-part vetting process helps give those eager to get started a piece of mind.
Real estate crowdfunding is, and for good reason, a growing phenomenon in the investment sphere. Used correctly, it can help both those wanting to finance investments as well as those receiving funding. Be sure to study crowdfunding platforms for real estate and consider due diligence when making investments, as this is a newer phenomenon. If you want to try a non-traditional method of investment in real estate, crowdfunding could be the path to a new form of productive investment.