A mere ten years ago, real estate investing was limited to only accredited, wealthy investors. However, thanks to the JOBS Act of 2012, real estate crowdfunding was given the green light, which opened up a bunch of new investment opportunities for the average person!
With so many different ways to invest and make money through the latest advancements in technology, it’s important for us to always discuss what trends are making headlines and revenue for individuals and entrepreneurs around the world. Just like with blogging, affiliate marketing and investing in stocks, investing in real estate through crowdfunding efforts is proving to be quite effective as well.
Crowdfunding involves raising capital in small increments from multiple investors, and real estate crowdfunding works the exact same way. These companies allow investors to make fractional investments in their various properties and real estate assets, although the exact specifics vary from company to company. While some businesses center around offering loans to property flippers, others may focus on property management or portfolio diversification.
This method of crowdfunding seems genius, but—as an investor—there are some important factors for you to consider. Keep reading to learn about the advantages and drawbacks of real estate crowdfunding!
The Advantages of Real Estate Crowdfunding
Let’s take a look at the positives first. A crowdfunded approach offers many advantages over more traditional options, making it a smart option for non-accredited investors and those with less capital to spare.
The Barrier to Entry
To be considered an accredited investor, one’s income must exceed $200k per year ($300k for joint investors) and their net worth must be over $1,000,000. For many, these requirements are simply unrealistic, and—unfortunately—most traditional real estate investment opportunities are limited to accredited investors only. True, there are some crowdfunding platforms like First National Realty Partners which still are only open to accredited investors, but there are many crowdfunding platforms that will accept non-accredited investors as well!
Budget-Friendly Requirements
With more traditional real estate investing, it’s not unusual to see minimum deposit requirements of $25,000 or more! Crowdfunded platforms may sometimes require these large deposits, but it’s entirely dependent on the platform. Some platforms allow individuals to begin investing in real estate with as little as $500! No matter your financial situation, you’ll be able to find an affordable deposit if you’re willing to look around a bit.
Potential Profits
As with any type of investing, the purpose is to make a profit! While specific profit margins will vary from platform to platform, in general, investors can expect to enjoy a large return on their investments. For example, EquityMultiple has an average return of 17.4%! This easily outperforms the S&P 500, which has enjoyed an average return of only 11.88 since its inception in 1957.
The Drawbacks of Real Estate Crowdfunding
While opting for crowdfunded investment options has its advantages, there are also a few drawbacks that you should take into account. For example, some platforms may allow you to pull out of your investments, others may lock you in for years. Inconsistencies like this highlight the importance of conducting research before making a commitment.
The Risk
The exact risks you’ll be dealing with depend on the platform you choose. One possible risk is the risk of having poor investments made on your behalf. Some crowdfunding platforms don’t allow you to invest in specific properties, instead only allowing complete portfolio investments. While this instant diversification somewhat protects you from specific property failures, it won’t do much good if the entire portfolio performs poorly. Another possible risk is defaulting. If the platform you choose involves lending money directly to property owners, there’s always the possibility that they won’t pay back their loans!
Lack of Liquidity
Crowdfunded real estate generally lacks liquidity. While selling your investments may be possible on some platforms, this isn’t a universal truth. Furthermore, some companies may charge you fees if you don’t wait long enough before selling your shares back to them. Other companies may not buy back the shares directly, instead requiring you to sell the shares to another investor. Of course, this process itself is time-consuming.
Inconsistent Fees
As we’re sure you’ve realized by now, you’re unlikely to notice a lot of consistency between the various real estate crowdfunding platforms. This pattern remains true when it comes to fees, which vary widely from platform to platform. Although many charge a simplified annual fee, the exact rates may differ. It’s important to compare platforms (and their fees) against their historical performance when selecting a platform, as higher fees may outweigh the benefits of a higher return.
Real Estate Crowdfunding
As with any other type of investing, real estate crowdfunding offers unique opportunities to potential investors. While the performance may not be as impressive as alternative investment methods, this type of investing provides relatively consistent returns with minimal risk. Furthermore, real estate crowdfunding also opens up this type of investing to nearly budget, and can even offer instant portfolio diversification with a single investment!
If you’re a non-accredited individual who’s interested in adding real estate to your portfolio, it’s especially worth taking a look into various real estate crowdfunding platforms. With plenty of options to choose from—and more being formed every year—you’re sure to find a platform that both produces the results you want and meets your financial requirements.
In addition to all of the useful content provided above, there have been many other real estate and investment related articles on this blog as well. We recommend you take a look at this recent article on a Beverly Hills location that sold for a 10th of what it’s actually worth!