Trends are constantly changing, but it seems like crowdfunding has made its way into every real estate investor’s dictionary. But not everyone is so eager to embrace it, because this trend is here to stay, or it is just temporary? Even though crowdfunding is still something new, it is rapidly reshaping the way real estate investors can invest in properties. To have a better understanding of how it works, we have prepared a quick guide and some of the benefits that come with real estate crowdfunding.
So, real estate crowdfunding is a method of real estate investing that involves the pooling of funds by several investors when dealing with a certain investment project. You can choose from two main types of investments:
- Equity Investments – Where investors make investments in residential or commercial properties and, in exchange, they hold an equity stake in the property. Every investor will be sharing a portion of the rental income the property will generate.
- Debt Investments – This means that you will be investing in a mortgage loan that is associated with a particular property, and as the loan is repaid, the investor will receive a share of the interest.
Between these two, equity investments have the potential for bigger returns because the profitability of debt investments is limited by the interest rate of the loan. But, equity investments are riskier and in many cases require a longer holding period.
There is no doubt that real estate crowdfunding has a lot of benefits for investors who are seeking access to private real estate investments. When compared to investing in a REIT or purchasing an investment property in a traditional way, crowdfunding has several benefits, so continue reading to find out what those are.
One of the major benefits of real estate crowdfunding platforms is that no other type of real estate investment offers this amount of transparency. For instance, with REIT, investors only have a limited amount of information about the access shared with them and they also have limited knowledge of where their investment dollars are really going.
But, when it comes to real estate crowdfunding, crowdfunding platforms allow to carefully vet each deal and at the exact moment when they are available, the investors have the opportunity to see some finer details before they commit to their final investment decision.
Investors have a ton of options when it comes to real estate crowdfunding, mainly because the investors are not restricted to a single project or a real estate company. They can spread a couple of smaller investments across several projects or companies, and this way, reduce any underlying risks. This is great because, if one real estate investment project fails and does not meet your expectations, you will still have other investments that have the potential to be successful.
For real estate investors who are looking to increase the diversity of their portfolio, real estate crowdfunding is one of the best ways to achieve this. This is because they have the luxury of gaining more exposure to a broader range of property types and opportunities, and they can enter an entirely new asset class.
The company that operates the real estate crowdfunding platform will be doing all the dirty work for you. For instance, scouting out all of the hottest properties that are on the market and deals that will otherwise be unseen by an individual. These crowdfunding platforms have operators that are bringing the deals to them, and the company running them underwrites to ensure that only quality deals are being brought to the table.
Real estate crowdfunding also allows the investors to benefit from certain tax deductions, like depreciation, which normally applies to owning an investment property. Every real estate crowdfunding platform is different and some are a better fit than others. Research and check for marketplace reviews to identify the weaknesses and strengths, because this is an important first step for every real estate investor.
All in all, real estate crowdfunding represents a perfect opportunity for investors to get otherwise unknown deals and still expect reduced risk and increased benefits.