Real estate crowdfunding is a great way of taking your investment portfolio to a new height. A new option that many people are embracing to raise capital for their real estate project is crowdfunding in real estate. Though it’s relatively new, the popularity of real estate crowdfunding is growing by the day.
However, how does this process work? What are the benefits of crowdfunding to real estate? What returns to expect after investing in someone else’s crowdfunding project.
Though not the traditional way of raising capital for projects, it’s quite important for real estate investors to understand this amazing form of financing real estate projects.
What is Real Estate Crowdfunding?
Whether you are interested in investing small amounts of cash in a project to start real estate business or new to real estate investment, you can have a stake in a project and earn monthly or quarterly returns, as long as you know what to do.
Crowdfunding is used by business owners to raise money. This is achieved by getting across to a large pool of investors who individually contribute a portion of money towards the project. What differentiates between crowdfunding and the other traditional ways of raising money is the platform on which it’s done – crowdfunding is usually done online.
Besides, business owners, in addition to crowdfunding sites, make use of other social media platforms like Twitter or Facebook to sell their investment to a wider audience interested in investing in the project.
So, real estate crowdfunding consists of a different online channel where real estate investors come to raise money. This can be either through debt financing or equity investment for investors to invest money in the projects. They function as a peer to peer investment websites by connecting those who require capital with those who can offer it.
However, since the middlemen (bank) have been taken off, the crowdfunding sites do not only offer a high rate of returns to investors but they also charge lower interest rates to developers. This is a win-win situation for both the investors and business owners, and this is the reason for its growing popularity.
Types Of Investments
A good understanding of the types of investment would make investors get the best from any investment. There are two main types of real estate crowdfunding; these are equity investments and debt investments
Equity investments: It gives an investor passive ownership in a project. This is a long-term investment opportunity that offers returns from an appreciation of the property and rental income. Investors can enjoy shares after investing in a single property or a portfolio of properties.
They are extended periods and can be up to 10 years. The properties can be new ones or those that require repairs. Also, investors can enjoy quarterly distribution making them enjoy passive income without putting in extra work. Besides, you could also get your returns after selling the property at a price higher than it was purchased.
The two types of equity investments are common equity and preferred equity. These two have different returns on investment, different risk levels, and different forms of security.
Debt investments: This is when you invest in either a single mortgage or a group of mortgages. Providing the loans would make you earn an income in the form of interest as well as repayment from the developer.
The property that is built would be used as a security for the loan – the loan term is usually between 6 months to two years. In the agreement, the exit time from the investment would be stated, so, you cannot exit early and collect your money. Payments are done monthly or quarterly.
Why Consider Real Estate Crowdfunding
Crowdfunding has made real estate affordable and attractive for many people – this makes it a formidable option that investors can easily and quickly diversify portfolios without much stress.
So, you might want to consider real estate crowdfunding for the following reasons;
Passive investments – Investing through crowdfunding, investors do not need to invest too much time in any responsibilities.
Investors can hand-pick their investment – Investors can pick any investment that best suits their goals.
Small initial investments – With as low as $5,000, you can invest in many real estate crowdfunding platforms. Since individual investment can go for as little as $1,000, the initial investment can be shared across other projects.
Low fees – Crowdfunding platforms offer reduced cost than several other investment platforms. However, some platforms will request for part of the profits and also charge a fee after the investor is paid.
More control than real estate investment trust (REITs) – Though there are similarities between real estate crowdfunding and REITs, real estate crowdfunding gives better control over specific projects you directly invest into, either in a local, fix and flip, and single-family projects.
Best Real Estate Crowdfunding Platform
Settling for the best crowdfunding platform can be difficult because many factors should be considered. Some of the factors to consider before choosing the right platform are;
- Available investments
- Track record of the platform
- Type of security available
- The expected return
- Fees to be paid
- Type of regulations that governs the investment
However, the following are recommended real estate crowdfunding platforms;
iFunding – For single-family residential and commercial retail projects. It’s built with professionals that can assist in raising capital for projects. The minimum investment is $5,000
Fundrise – It is an online marketplace with investment for as little as $5,000. It was established in 2012 and has since connected many real estate investors with property owners.
Prodigy Network – For commercial real estate. The minimum investment is $10,000 and investors are expected to go through a six-part vetting process to get started.
RealtyShares – Minimum requirement of $5,000. The platform allows developers to present their projects to potential investors. However, investors can check through commercial, retail, pre-screened, and mix-use projects.
Patch of Land – It serves as a link between borrowers and investors in search of short-term and high-yield investment.
RealtyMogul – Minimum investment of $5,000. It covers both equity and debt investors. Here, they prioritize investors’ protection by ensuring all the investment opportunities are thoroughly checked.
Investment Limits of Real Estate Crowdfunding
The United States Securities and Exchange Commission has regulations for lenders who are not accredited – this is to account for risk associated with crowdfunding. There are limits to be contributed to deals depending on the investor’s income. Having an annual income of less than $107,000 – you can invest 5% of your income with a maximum of $2,200 permitted.
However, with above $107,000 income, the investment can be up to 10% with a maximum of $107,000.
Real estate crowdfunding is a rising trend in the world of investment and if used correctly, can be beneficial to both developers and investors alike. So, do due diligence in checking out the crowdfunding platforms thoroughly before making any investment.