Property crowdfunding is growing in popularity. As an investor, you likely want to get involved. However, there are still a lot of aspects of property crowdfunding that can be overwhelming. There is a lot to consider, such as the risks, selecting the right platform and whether you can beat the market?
1. What is real-estate crowdfunding?
Property crowdfunding is a relatively new way of investing in property, which has taken off in recent years. It allows investors to buy into property-based projects at the click of a button, with the potential for returns. And it’s not just big investors who can take part — ordinary people can do it too.
2. How does real estate crowdfunding work?
Within the property market, crowdfunding is becoming a popular alternative to traditional forms of mortgage finance as it allows small investors to do what traditionally only banks and large financial institutions could do.
Crowdfunding for property works in much the same way as crowdfunding for any other type of business venture. For example, a property developer will post a listing online asking investors to contribute funds toward a project’s completion.
Each investor will purchase shares in the project, and their contribution becomes part of the funding pot that ultimately allows the developer to complete the project. Online platforms have made this much easier than before, as they allow developers and investors to meet without going through a third party – like a bank – which takes time and costs money.
Investors will receive returns based on their shareholding size once the project has been completed and sold on. This can be either a huge payout or paid out over time in an “income share agreement.”
3. Who can do real-estate crowdfunding?
The simple answer to this question is that real-estate crowdfunding is for everyone. Real-estate crowdfunding will have something right for you, whether you are a developer, investor, or someone looking for a new place to live, like JMU off-campus housing.
4. What are the advantages of real-estate crowdfunding?
Less capital risk
Investing in real estate traditionally requires a lot of capital upfront, which can be challenging for many investors to come up with at once. For example, crowdfunding lets you invest in property online with just $1,000 or less.
Average returns on investment are 12%–15% annually — much higher than other investments, from stocks to bonds. For example, one study found that investing in commercial real estate is five times more profitable than investing in REITs.
Because you can begin with such a small investment and spread your funds across many properties, it’s easy to diversify your investments by location and type of property — a key component of long-term success.
You don’t have to get involved in the day-to-day management and upkeep of your properties when you crowdfund them through a provider because someone else takes care of all that for you.
Less time for commitment
Since you only need to put down a small amount upfront, it gives you more time to earn your 20% down payment for a traditional mortgage. So, for example, you can expect to earn an average yield rate of 10% — with no management or maintenance fees — while you save up for your future home.
A passive income source
You can feel confident about property management or maintenance costs with real estate crowdfunding. For example, if it were a single-family home, you would usually have to deal with the tenant’s complaints and repairs yourself — but since it’s a crowdfunded project, the property developer deals with those issues directly; thus, it is passive income.
5. What are the disadvantages of real-estate crowdfunding?
Less control over the property
A significant disadvantage to real-estate crowdfunding is the lack of control investors have over the property. Outside of providing input on big decisions, investors are often left in the dark regarding day-to-day operations. Investors can request financials and other information from the sponsor, but there’s no guarantee they’ll receive it.
Real estate is an illiquid asset. If you invest in a single investment property, you may not be able to cash out for years — unless you’re willing to sell your share at a steep discount. While some platforms allow investors to sell their shares before the exit date, it might require selling at steep discounts or even losing money on your investment.
Overall, property crowdfunding has allowed a whole range of people to invest in the property, which generally wouldn’t have had the opportunity to do so. Whether you are an experienced investor or a complete beginner, it’s never been easier or more affordable to take the step and start investing.