Before the Jumpstart Our Business Startup (JOBS) Act of 2012, individual investors were unable to participate in private property transactions. The government feared unsavory real estate developers would take advantage of individuals who were unable to do due diligence properly.
Yet it did change things. Crowdfunding platforms now offer a plethora of opportunities online, opening up a world of possibilities for players who have never before had the opportunity to play with big guys.
Of course just because you can’t mean you ought to. Immovable properties have particular dynamics, distinctions, risks and benefits. And to invest effectively in private transactions like those provided by crowdfunding platforms, you need to understand and navigate these.
Crowdfunding for real estate professionals
Connection is the major benefit of real estate crowdfunding. Connect to Offers. Link to study in internet. Access to the convenience of technology driven transactions and their efficiency. Commercial and residential developments, which were only open to the rich, are readily available to individual investors via online platforms.
It used to be that the only way for small investors to add real estate to their portfolios was through real estate investment trusts ( REITs). Many private real estate deals require minimum investment of $250,000, and developers are expected to be approved. Crowdfunding platforms provide direct access to pre-vetted deals for investors with much lower minimum investments.
And, unlike REITs, crowdfunding platforms allow investors to participate, without direct ownership, in specific properties and projects.
Investing in traditional real estate — like owning a rent or fixing and flipping — can take a lot of money. And the investment can be risky because that money goes into a single property. But crowdfunding projects allow investors with minimal investment to own a portion of bigger projects.
Therefore, instead of putting down $200,000 to buy one property at one venue, through a crowdfunding platform, you could spread the risk around eight different locations and property types with a minimum investment of $25,000 each. Most crowdfunding sites offer a smaller minimum contribution of $5,000 and a handful are as small as $1,000 and you can diversify and distribute the risk further.
Another value of incorporating real estate to a portfolio of assets is total flexibility. That is because real estate is not specifically associated with volatility in the stock market. If markets are unpredictable, immovable property is usually not a long-term investment.
That is not done by REITs, since they are listed on the stock exchange. Its values tend to ebb and flow with fluctuations in the stock price which are disproportionate to the property held within the REIT.
Economic shifts also impact direct investment in real estate, whether through crowdfunding or obtained through individual purchases. But they aren’t directly correlated to stock market ups and downs.
Ordinary cash balance
Crowdfunding assets usually have recurring monthly or quarterly payouts dependent on leasing profits or productivity.
Fundrise, an online crowdfunding service, has announced that, in the second quarter of 2019, its investors earned over $9.4 million in total dividends. This delivered more than $6.1 million in Q1 2019.
Though not guaranteed, these payouts are in addition to a capital appreciation return on investment when the project is complete.
Getting started fast
Investing in real estate is easy by crowdfunding. On a website, you set up an account, pick your investment and submit money to fund the offer. You will review the deal online, with complete due diligence. There are no closure documents to sign or ongoing expenses to keep a real estate. You can track the performance of the investment and control it by just a few clicks.
Nevertheless, keep in mind that many platforms offer only deals available to accredited investors. To prove that you qualify before you can participate in those projects, you will need to submit income or net worth statements.
Many crowdfunding sites specialize in a real estate subsector. Some only offer commercial deals while others only host residential deals. There are equity and debt options within those broad categories.
Cons in crowdfunding immovables
Crowdfunding real estate is a modern, untested field
Real estate is a long-term investment and it is relatively new to crowdfunding. Long-term performance is not track record yet.
Too many crowdfunding real estate sites sprung up after the Employment Act that not all of them would survive. So you can’t predict which ones will go belly-up with reasonable certainty.
Several websites find early findings to be promising and capital from investors is pouring in. And the opposite is true, too: RealtyShares has just closed its doors to new investors, and the future of current deals is uncertain as the company is downsizing from 100 to 15 people.
Investors don’t have power over operations
When you spend the traditional way in real estate, you are doing it yourself. You own a single-family home or an apartment building, and you have direct control over the whole thing and manage it as you like.
Investing in a crowdfunded commodity ensures that you rely on the marketing team to drive the returns for you as opposed to direct investing. You ‘re not much in charge of those returns. You have to trust developers and managers to accomplish goals and manage all aspects of the project with success.
Some of the market’s crowdfunding platforms are technology companies that simply provide an online trading marketplace. Others were started and are run by businessmen with a background in the real estate industry. Conduct the work into the companies and managers who make decisions about the ventures you are interested in.
Distributions shall not be ensured
The SEC requires REITs to allocate to owners 90 per cent of their earnings. Although crowdfunded investment supporters announce monthly or quarterly distributions, there is no assurance that they will. And if the project goes wrong, there may be no distributable benefit.
Due diligence can be difficult
Due diligence on crowdfunded real estate deals can be very difficult to achieve. Many buyers lack the resources and technical expertise to accurately analyze transactions. And the real estate deals require knowledge of the local market.
If you participate in a crowdfunded project you place your trust in the sponsor ‘s capacity. You have to be assured that the deal-vetting process has been rigorous and the management team will do everything they can to mitigate the risk and increase ROI over the project term.
Harm to invest
Real estate investment has unique risks and crowdfunding has inherent risk as a means of investing in real estate. Crowdfunding can be very dangerous if you don’t grasp how to do proper due diligence on real estate deals and the sponsors behind them.
There’s no promise for your savings. If the platform goes under (and it’s inevitable that some will popp up after the passage of the JOBs Act as hundreds of platforms), there’s a chance you’ll lose all of your capital. And if the particular project you ‘re investing in doesn’t go as planned, you could lose not only the cash flow you ‘re counting on, but your initial investment as well.
REITs are exchanged in stock exchange shares and if you need to cash out, your capital is available. Yet once you’re investing in a crowdfunded contract, or if you’re usually buying investment properties, the money’s tied up and not easily liquidated.
Longer hold time needed
Real estate is a long-term investment which generates wealth over time. Because of that and since trading costs are high, developers never exchange real estate assets into and out of them.
Crowdfunding vs conventional investments and REITs
|Brought-after real estate deals||Standard real estate holding (the possession of cash streaming rents)||Real Estate Investment Trusts (REITs)|
|STOCK CORRELATION DE MARKET||Some||a few||Some|
|Speed CASH FLOW||Distributions annually||Rental profits for the month||Payout varies; REITS must pay lenders 90 per cent of earnings|
|Check COSTS||Transaction expenses of 1–3 per cent plus recurring service charge||No broker fee per annum||Varies according to REIT category|
|ABILITY TO TAKE AVANTAGE OF Phenomena MARKET||Special edition||High||Low|
|REQUESTS On Transactions||You will engage in many types of transactions in many different markets because of the small minimum investment||The number of deals in which you can invest is limited by the amount of capital you must invest in||Investor does not have power over collection or usability of the contract|
|COMPLEXITY DE INVESTMENT||Quick to invest in (establish account, fund and choose deal)||Needs “Know-how.” Lots of moving parts which need to be handled skillfully||Quick to trade in (Stock exchange trading)|
|The least to invest||As small as $1,000, typically $5,000–$10,000||$15,000–$25,000; is local. Usually 20 per cent down payment is needed||Prices for single shares can be cheap (less than $10), but trading costs mean you can not purchase several shares at once.|
|INTERVIEW Required||Often deals are pre-examined but due diligence is important and not easy||Self-directed; investors must exercise strong due diligence||Very little; due care done by fund managers for you|
|Problem||Mostly illiquid||Truly illiquid||Truly illiquid|
|DIVERSIFICATION ||Can be very diversified with limited funds||Limited; need substantial capital to diversify widely||Already diversified|
|INVESTMENT Management||Investor has no productivity leverage||Investor controls many aspects and can steer the project towards profitability||Investor does not control profitability|
|RIGHTS||Poor management, local market risk, crowdfunding industry / concept are untested||Risks to management and the market are easier to manage and mitigate||Poor management, risk for the local market|
|NEED CAPITAL TO INVEST||Minimum value for money||Requires substantial money or equity||Poor management, risk for the local market|
|ABILITY TO LEVERAGE or INVESTMENT SCALE||New deals readily available across platforms||Gigantic. With the structures in place, you can increase the debt leveraging effectively||You can invest more, but the savings can not be scale-up|
So, is crowdfunding a healthy investment in real estate? It is like wondering if stocks are a good investment. Certainly, some of the stocks are big investments but some are puppies. The same holds true with crowdfunding connections with real estate.
In the real estate crowdfunding room, you have to do your due diligence, just as you would before investing your hard-earned money in any single stock. Warren Buffett takes his own guidance on “investing in companies in markets you appreciate.”
If you don’t know anything about real estate (other than living in a house), it’s not an opportunity you can invest directly in, be it through investing or buying and holding individual investment properties.
In this low-interest – rate setting more investors are looking for yield. Crowdfunding offers the opportunity to get higher yields while diversifying some of your investments into real estate without the cash outlay of purchasing — and the hassle of acquiring and managing — rental properties yourself.
Here’s the long and short of it: crowdfunded real estate is a viable investment option to add real estate to the portfolio as a whole and aim for higher yields. But there are some things to keep in mind:
Do extensive research before making an investment on each deal. There are good deals, good deals on average and bad deals. Double focus on due diligence to get the best ones when buying.
Do extensive research themselves on the crowdfunding platform. Comprehend their business model, financial stability, fee structure, credibility, history of transactions, etc.
Diversify your asset allocation into both debt and equity investments (just as your stock portfolio would be diversified into stocks and bonds).
Diversify into various types of property and locations (to reduce the risk of a particular form of property collapsing or a decline in a local real estate market that bombs the portfolio).
Understand that real estate markets are central, so invest in an environment that you already know or are able to research thoroughly and comfortably.
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