Crowdfunding is becoming a major economic mechanism, and one of the big reasons for that is the expansion of the model into real estate. Over the past several years, crowdfunding has grown into a multi-billion dollar enterprise, and the real estate crowdfunding component of that enterprise is expected to comprise $2.5 billion this year, according to Entrepreneur.
As an investor, you may be wondering whether or not real estate crowdfunding is right for you. There can be no doubt that it offers a number of different benefits, and that you should strongly consider getting involved. However, as with any other investment opportunity, it is not without its risks. We’ll be exploring both of these topics below.
The Case For Real Estate Crowdfunding
As far as investment opportunities are concerned, real estate is without a doubt one of the most attractive. However, in the past, investment in real estate has only been available to a small subset of investors in the United States. There are a number of different reasons for this. For one, investing in real estate requires an individual investor to make a substantial commitment of their available capital – real estate is expensive. In addition, the real estate market is incredibly complex, and most individual investors do not possess the knowledge to purchase and then manage real property.
Real estate crowdfunding changes this entirely, opening up real estate investment opportunities to a much greater number of individual investors. For one, the crowdfunding model means that an individual investor does not need to purchase real property in its entirety. Rather, their investment is pooled with the investments of other investors. This means a less significant capital outlay is needed, and risk is – to a certain extent – mitigated. Further, since the investors will not themselves be responsible for the management of the real property purchased, they will not need to concern themselves with some of the more particular details involved with real estate investment.
The Benefits of Real Estate Crowdfunding
Choosing to become involved in real estate crowdfunding presents a number of different benefits to the willing investor.
- Breaking the REIT model: In the past, those who wanted to become involved in the real estate market but lacked the necessary capital would become involved in real estate investment trusts. While REITs are certainly a viable way of becoming involved in real estate, there is a major disadvantage. The value of any individual REIT is not determined by the properties in which the REIT is invested. Rather, it is subject to the mood of the market overall.
- Full knowledge: There is another disadvantage to REITs which the crowdfunding model obviates. With a REIT, you are not able to know what kinds of property you are investing in. With crowdfunding, however, you will have full knowledge of the property that your investment is going toward. This allows you to conduct more thorough research and to make sounder investments.
- Diversification: If you’re putting your money to work through investments, diversification is always a good thing. Because crowdfunding makes real estate investment available to a greater number of investors, it creates the potential for those investors to add even greater diversity to their portfolios. In addition, these investors can also become involved with different kinds of real estate, from commercial to residential.
- Great Returns: Obviously, the large draw to real estate investment is the potential return that it offers. These returns, however, have been largely closed off to a large swath of investors in the past. Real estate crowdfunding changes this entirely, allowing for more people to reap the benefits of owning and holding real estate.
There are, of course, other benefits to becoming involved in real estate crowdfunding, but the above are, without a doubt, the most important.
The Potential Risks of Real Estate Crowdfunding
As with any investment opportunity, the potential for great reward comes with attendant risks. The risks of the real estate market are also different than those that are present in other markets. For this reason, it’s important that you understand what risks are inherent in real estate before you become involved.
The most obvious of these risks is that things can go wrong with real estate. Just the same as anything can happen to the home in which you live, so too can anything happen with the real property that you become invested in. For example, a fire could damage a property in which you’re invested, or the tenants of that property might not pay their rent. In addition, a property could be vulnerable to various legal troubles.
Also, like other investment opportunities, the FDIC does not back a real estate crowdfunding investment. It is therefore important that you are able to tolerate the potential for loss with respect to any investment that you make. Should something go awry, you will not be able to recover your investment through a federal agency like the FDIC.
Of course, if you’re an investor, you understand full well that your investments come with risk. Ultimately, through smart investments and diversification, you can mitigate the risk to which you’re exposed through sound strategy. Further, by conducting thorough research upon the properties in which you’d like to become involved, you can do your due diligence with respect to mitigating the risk of unforeseen events. In the end, the risks of real estate crowdfunding cannot dampen the potential rewards of becoming involved.
The Decision Is Yours
We’re very excited about our platform, and we’d love for you to become involved. We deal primarily with residential mortgages, giving investors the opportunity to expand their portfolios, while at the same time giving homeowners more options when it comes to avoiding foreclosure on their properties. In our eyes, that’s a win-win proposition. If you feel that you’d like to add real estate to your investment portfolio and believe that you can tolerate the inherent risks of the real estate market, then crowdfunding is the easiest way to get involved. Sign up, and explore what investment opportunities we have available!