How risky is crowdfunding for real estate?

Crowdfunding_Risks

There is no question that crowdfunding for real estate offers enormous opportunities for qualifying investors. The returns are competitive, and a passive investment. Yet how risky does crowdfunding become? Every investment has a risk element and crowdfunding for immovable property is no exception. Comprehending the potential pitfalls allows you to compare the risk and reward to determine whether it is the right investment for you.

Why pick crowdfunding for real estate?

Crowdfunding helps qualified investors to engage at a low upfront cost in commercial real estate transactions. For several reasons: Real estate crowdfunding is an attractive investment option:

  • The investment is a minority interest, meaning that you don’t need to handle the property directly.
  • With as little as $1,000, you can enter in several offers.
  • You pick the particular investment opportunity you want to participate in and you know exactly what industry, regional market and particular asset your money is investing in opposed to a REIT where your money is distributed over many investments, often in many geographic areas and potentially sectors.
  • Most crowdfunding investments deliver returns that are higher than the average risk-adjusted.

It’s obvious why crowdfunding is an attractive option for investors to see in real estate. There are questions to be learned though. Let’s look at the dangers of investing in crowdfunding for real estate.

Your choice of crowdfunding platform matters

Not every crowdfunding platform is treated as equivalent. The abrupt closure of RealtyShares crowdfunding platform shook the crowdfunding real estate scene in 2018. The closure has made the feasibility of other sites uncertain.

Every platform has a different process on their website to vet the deals. Our investment incentives work in different ways too. Knowing how the crowdfunding platform seeks out the deal sponsor is imperative. Some platforms are very selective, while others are less scrutinised.

Yet remember: Profitability on property and sponsor of your investment runs. Deciding that the investment is of high quality is not just up to the crowdfunding site β€” it’s yours too.

If you are not seeing information on the crowdfunding website about the vetting process, ask questions to learn more about it. See why it is better (or worse) than other options on the platform.

Yet remember: Profitability on property and sponsor of your investment runs. Deciding that the investment is of high quality is not just up to the crowdfunding site β€” it is also yours.

If you are not seeing information on the crowdfunding website about the vetting process, ask questions to learn more about it. See why it is better (or worse) than other options on the platform.

Due diligence is limited

Opportunities on crowdfunding platforms include a memorandum of offer (OM) and/or a summary of the investment by executive.

The OM provides you with an in-depth view of the house, the investor, financials, long-term plans, and an investment overview. For potential investors, this knowledge is detailed and helpful. But without a high level of investment experience in real estate, it may still be hard to determine whether or not this is a worthy investment.

Without expertise in an asset class or geographic area, there is limited capacity of the average crowdfunding investor to review and assess opportunities. It is another reason you choose crowdfunding site. Most investors place a great deal of confidence in the platform, and their ability to pick successful investments.

The investment’s future is in sponsor’s hands

The sponsor is the individual or organization which controls the investment. This covers:

  • Negotiate purchase price, terms and conditions,
  • Resource management by growth and construction, and
  • In the end decide the optimal time to sell the asset.

The crowdfunding site is relevant but it matters most to the sponsor. The investment’s viability and profitability depend on the sponsor and the ability of its management team to run the asset well.

Look to the track record of the sponsor. See how many assets it owns and administers. Take time to research the results of previous investments.

Some investors would prefer to know the sponsor on a personal level, or have worked on past deals with them. Others may never feel confident with crowdfunding, since the investment ‘s success is out of control.

It’s up to you, and to your comfort level. Before making an investment, ensure that you agree with the investment plan and management strategy of the sponsor. If you are sure that they will yield a return, then go ahead and make the investment.

Returns are not guaranteed

Investing is without assured returns β€” ever. It doesn’t matter whether you invest in stocks, bonds or real estate. There are always factors which can have a negative effect on the investment performance. Market volatility and building failures are two common in crowdfunding for immovables.

Investments in crowdfunding might not get the projected return. This could reduce the return on the investor’s dividend providing a lower than expected yield.

A couple of worst-case scenarios, too. It could be that the investment fails. Will the sponsor file for bankruptcy. The asset will undergo foreclosure. The sponsor may not be required to return an interest or principal, depending on the circumstances. Most crowdfunding sites take action to protect investors, but not always.

There’s no guarantee that you’ll get your advertised return, or even your capital return. Crowdfunding is not evidence of lawsuits, fraud, or recession. You’ve got to be comfortable with that before you invest.

Faible liquidity

Liquidity is one of the most enticing aspects of investing in a REIT or real estate ETF; at a notice the capital can be invested or withdrawn.

There is poor access of crowdfunding real estate. Many investments take at least two years before you can get your return on cash. And if you want a decent return on your investment, you can need to keep your money there for years; up to a decade at times.

The lack of liquidity is one of the reasons why crowdfunding platforms frequently deliver higher returns than provided by REITs or real estate ETF. If you are preoccupied with liquidity, find a more conventional form of investment in real estate.

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