Crowdfunding is just one way businesses can raise money for their products and services. This type of fundraising can be used for many industries, including real estate, using the same models. Instead of looking for investors or getting mortgage loans, consumers can pool their money online, allowing developers to raise money for projects and investors to make their investments work for them.
Crowdfunding is easy for everyone, including investors, because you don’t need a large lump sum to begin investing. Instead, you can join a crowdfunding side and get various rewards depending on how much money you give. Together, investors can pool their money to purchase property or a share of the property and diversify their portfolios through real estate investments.
What is Real Estate Crowdfunding?
Crowdfunding is a method where businesses or individuals ask the public to contribute startup capital to fund new ventures, such as building a new community or a single property. Using online fundraising, investors can be pitched easily and decide how much they want to invest. Individuals who contribute to the pool of capital can provide financial backing for other real estate investments. These opportunities can include residential or commercial holdings for housing development, retail or office space, and partial ownership of these properties.
Investors might choose real estate crowdfunding for many reasons, including:
- To diversify their investment portfolio
- Low capital requirement compared to other types of investment opportunities
- Shared cost structure
- Risk is split among stakeholders
- Access to new investment opportunities
- Doesn’t require owners to guarantee loans
- No need to qualify for loans
- Ability to hold commercial and residential real estate properties
- Exposure to the real estate market without a large time investment
How Does It Work?
Crowdfunding is easy for businesses and inventors, and it’s fairly popular among individuals that want to grow their wealth without investing too much money or time in real estate. But unfortunately, real estate often requires owners to qualify and obtain a mortgage loan, which means a huge down payment and monthly costs.
Crowdfunding requires none of these same upfront costs, allowing investors to pool their money on crowdfunding sites to make a profit. Most investors only need a few hundred dollars and don’t have to worry about mortgage loans or maintaining their properties. Crowdfunded investments differ from Real Estate Investment Trusts (REITs) because they’re privately held and don’t pay regular earnings in the form of dividends. Instead, investors make a one-time or ongoing profit based on their investments.
Real estate providers can offer investors access to different real estate investments and markets that are unavailable to the public. They may even offer higher returns than REITs due to their higher degree of risk.
Since crowdfunding projects can fall through at any moment, investors can easily lose everything they invested with no chance of getting it back. Therefore, investors need to do their research and only invest what they’re willing to lose. Real estate crowdfunding should never be used as a way to generate substantial wealth; instead, you should only use it to diversify your existing portfolio, which consists of stocks, bonds, and other assets.
Real Estate Crowdfunding Pros and Cons
There are pros and cons to real estate crowdfunding for investors, so before committing to investing via crowdfunding, you should consider the various advantages and disadvantages.
Pros of Real Estate Crowdfunding
Real estate crowdfunding pays larger dividends and allows property owners to diversify their investment portfolios. Through crowdfunding, you’ll have access to opportunities you won’t publicly, eliminating any concerns that many property owners encounter. Additionally, there’s minimal upfront or ongoing investment compared to other types of real estate investing.
Cons of Real Estate Crowdfunding
Real estate crowdfunding typically requires you to sign up to use a specific platform, which may require fees. Additionally, unlike other investments like stocks, you can’t easily sell off your assets, and participants have to pay taxes on dividends. Crowdfunding also means that projects don’t have a long track record of success, so you don’t actually know whether or not to put your faith in a project or company. In addition, some platforms require you to become an accredited investor, which means you’ll need to pay more to participate.
How To Start Crowdfunding Investing
If you want to start investing in real estate through crowdfunding, you’ll need to choose a platform to use. There are many different types of platforms, so it’s important to do your research to find the best opportunities. You can use multiple platforms or just one, but you should read their guidelines for investing and how the process works. A few sites you can use to find real estate crowdfunding opportunities include:
Compare the sites’ services, fees, terms, and opportunities. You should also look outside the platforms for reviews, including the pros and cons of the different platforms available. Finally, before you begin investing, consider how much you can afford to lose. Since your investments aren’t guaranteed, you should never invest more than you’re willing to lose.
When you’re ready to invest in a project, you’ll find these platforms are similar to other crowdfunding websites, so the process should be fairly straightforward. If you’re unsure how much to invest, consider talking to a financial advisor who can tell you what types of projects are good opportunities and how much money you should invest in them. Remember, the key is to diversify your portfolio, so these types of investments shouldn’t necessarily be used to grow your wealth.
Real estate crowdfunding allows you to expand your portfolio and dip your toe into the exciting real estate market. It’s ideal for individuals who don’t have a lot of money to start since you won’t have to worry about getting a loan to buy a home from a bank. But, of course, there are many other ways to invest in real estate, so do your research on stocks and different ways you can use the real estate market to grow your wealth.
Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.