If you have been reading about real estate crowdfunding, or a friend or family member has been speaking to you about the possibility, you likely have some questions that you would like to have answered. This is not only normal and understandable, but it is also wise. Crowdfunding, like any other type of investment, does come with risks and rewards. You need to understand both of those components before moving forward. In addition, as this is not your typical type of investment, you may wonder how it even works and if it fits within your current investment portfolio and level of risk tolerance. While there are many questions that many people typically asked when discussing the concept of real estate crowdfunding, consider the following five as a springboard to really getting you to think more about the possibilities.
What Exactly is Crowdfunding?
With the rising price of real estate today not only in America but also across the globe, the individual investor has gradually been squeezed out of the process. In addition, it is becoming increasingly difficult to fund larger scale projects as well due to the large amounts of financial capital required to even get a project off the ground. Real estate involves projects both large and small, and crowdfunding is way to raise investment funds for solid opportunities by allowing multiple investors to come in together and pool their money.
Crowdfunding is radically different than traditional forms of real estate investment. Such mediums typically began by investors looking for property, securing financing, and the commencing with project management. To solicit for funds in order to accomplish these same core objectives was often not feasible, and many markets not even legal. Real estate crowdfunding, however, serves to take advantage of today’s modern technology and combine that with new federal regulations that enable a centralized approach to raise funds for real estate projects, large and small. This has also changed the way money is solicited from investors. In the past, this was a cumbersome process that often involved one on one meeting and sales pitches, requiring a great deal of time on the part of all parties involved. With crowdfunding, however, a single platform can now be used to showcase project opportunities to interested investors no matter where they may be located. It has truly opened up the possibilities exponentially.
What Type of Information is Conveyed to a Potential Investor About a Property?
It should be mentioned that not all real estate crowdfunding platforms operate in the same way. However, investors should look for some type of transparency in the information that is provided throughout the process. Once you find a project that you are interested in, you should work with the information on the site to make certain that it is professionally managed. Investors should also be able to determine whether or not only high-rent sponsors are solicited, as this will contribute to more positive growth of the investment.
Is Crowdfunding Really That Different Than a REIT?
There can be no denying that REIT investments have grown in popularity in recent years, and they are certainly a viable and reliable vehicle to sink some money into. There are, however, numerous differences between REITs and real estate crowdfunding. These must be understood in order to ascertain the very reasons that crowdfunding continues to grow in popularity around the country. The first key distinction is that real estate crowdfunding provides the investor with multiple layers of diversification that simply is not available with a REIT. Investors via a crowdfunding platform are able to look through various properties on offer and choose the ones that they would like to pursue moving forward. Depending on an individual investor’s level of risk tolerance, he or she might desire to diversity into several different properties in order to protect the overall investment, even if the possible returns might be diminished. This feature is not available with a REIT, as investors do not have control over which properties are ultimately invested in.
In addition, real estate crowdfunding has a level of transparency built into the process that is not available with a REIT either. Investors are able to determine more information about the properties that they are interested in, and they have control over the location of the property as well. This enables investors to narrow down their crowdfunding options to the very geographical location that they are interested. This full transparency should be detailed on the real estate crowdfunding platform that you utilize, and it is a major reason that so many different types of investors are choosing to pursue this option.
How is Income Generated?
Remember that real estate investments should not be viewed as a short-term investment vehicle. While property managers will certainly strive to begin generating income on everyone’s investments as soon as possible, this is not always the case. In addition, your principle will likely be tied up for quite some time, so keep this in mind as well. Overall, however, this is to be expected with any real estate based investment, so as long as you are prepared for that, you should be able to move forward.
What Does the Future of Real Estate Crowdfunding Look Like?
The future of real estate crowdfunding certainly appears to be bright. The industry is already raising in excess of $2.5 billion annually, and this figures looks to continue to increase over 150 percent annually for each of the next 10 years. Internationally based platforms continue to open, and foreign investors are increasingly getting involved in the U.S. real estate market. All of these indicators point to a reality that crowdfunding is here to stay. There will likely more waves of regulation tied to it as the number of investors continues to grow, but this would be a positive development in order to protect everyone that is entering the real estate investment arena. The future looks to attract even investors that have minimal funds to invest, and this is encouraging as well, as it just serves to create more diversity in the markets.
Matthew Sullivan
@thecrowdventure
Images by Shutterstock
