Real Estate Crowdfunding: A Beginner’s Guide to Passive Property Investing
Without a doubt, real estate has always been a lucrative asset class worth investing in. In the past though, it has required a lot of capital, know-how, and hard work. But thanks to real estate crowdfunding, that has no longer been the case as it has enabled numerous investors to come forth and invest in real estate without having to break the bank or possess a vast amount of real estate knowledge.
In this guide, you will be taken through the basics of real estate crowdfunding, its operations, and lastly, the reasons for choosing it as a passive property investment strategy.
What is Real Estate Crowdfunding?
Real estate crowdfunding permits individuals to combine their resources to investment real estate projects.
Such projects can be constructs for single unit housing or multi-family houses, apartments, or even baby flipping business. Rather than assuming full ownership of a real estate property, the system allows member-owners of a funded project to own a portion of a funded real estate property and earn returns commensurate with the amount invested.
Crowdfunding platforms have popularized this model by allowing individuals to buy shares in real estate starting at $500. As a result, it has made real estate investments to be much easier and is accessible to a wider population especially those who do not have the funds to buy entire real estate.
How Does Real Estate Crowdfunding Work?
Real estate crowdfunding connects investors to real estate opportunities through an online platform. The intermediating sites guarantee mutual gains for the investors and the developers. The basic steps are as follows:
1. Developers List Their Projects on Crowdfunding Platforms
The development of real estate projects comes with high development costs and therefore the developers’ need to fund their projects.
They place their project proposals on the crowdfunding website’s which review and approve the listings if certain conditions are met.
2. Investors Browse and Choose Projects
Investors are free to open the platform, look for sites of interest, and select those which have high expected returns, short project durations, and even lower risk models. After a search, if an investor decides to back a particular project, he will proceed to do so.
3. Funding the Project
After a certain number of investors has contributed a set number of funds, then the construction or the renovation work of the project starts.
4. Earn Returns
During the duration of the investment, the progress of the investment may lead to payment of dividends as income, rental income, and growth in capital, Investors can expect a return on their investments.
Investment returns are based on equity-based or debt-based investment (this we will come to later).
Some Important Types of Real Estate Crowdfunding Investments
1. Equity-Based Crowdfunding
Under this model such as Equity Based Crowdfunding, people can fund a building project raising debt or fractions of ownership which is dependent on the amount of funding given and pays back with a sufficient return at lease rental and appreciation of the property in the future.
Rewards: Capable of generating a high return owing to growth in property value over time and income derived from rent.
Dangers: As a risk in this working model, if the project becomes a loss making it is very possible for the shareholders to write off much or all of their initial investment. Also, depending on capital markets the payout may take longer to receive.
2. Debt-Based Crowdfunding
Another type of real estate crowdfunding is debt-based where investors are offering mortgages to real estate brokers or people who own particular projects. Interest payments are in turn made to investors.
Rewards: There are guaranteed and stable returns always because it is based on interest, lower risk than equity based investments.
Dangers: It is very possible to expect lower yields unlike equity crowdfunding. Furthermore, it is also very possible that investors do not receive repayment in full amounts due to defaults from lenders.
What Advantages Come With Passive Income Through Real Estate Crowdfunding?
1. Low Entry Barriers
Investment in real estate in its traditional sense requires a large sum of investment in the beginning.
However, when it comes to investing online through a real estate crowdfunding platform, you can start with as little as $500 – $1000. This means even beginner investors who have little funds can take part in profitable real estate transactions.
2. Diversification
Crowdfunding allows you to make small investments in several properties or projects instead of making a large investment in one.
For instance, rather than investing all your funds in one rental property, you can spread your investment across several developments.
Diversification lowers risk since adverse performance by one project will not affect the entire portfolio.
3. Easy Return
Investors who are involved in real estate crowdfunding do not have to worry about active returns because most of the time, there is no direct involvement in managing the property.
Unlike owning physical real estate, investors do not have to deal with repairs, maintenance, or tenants.
All operational tasks are performed by the platform or the project manager.
4. Flexibility
One of the features of a real estate crowdfunding platform is the level of investment, which is often flexible.
You can opt for a short-term or a long-term project, debt or equity investment, or a particular type of real estate, that is, residential, commercial, industrial, etc.
Best Platforms for Real Estate Crowdfunding Over the years, there have emerged various platforms that engage in real estate crowdfunding.
While selecting one, it is important Google in sequential order as the following to note these areas: fees, the particular type of projects available, and quality of user experience on the platforms.
The following are some of the preferred sites by beginners.
1. Fundrise
Fundrise is among the most well-known websites, in which both equity and debt investments can be made. As little as $500 can be invested by the investors which is why beginners love this platform.
Fundrise gives investors a range of residential and commercial projects as well as allows their clients.
They allow a coverage of eREITs (electronic real estate investment trusts) and give a variety of eREITs for further diversification.
2. RealtyMogul
RealtyMogul allows investing in individual properties or owning shares of a real estate company and so enables individuals to have a diverse range of options. Specifically accredited investors have the option of investing in particular properties, while those who are not accredited can participate via shares of the REIT.
3. CrowdStreet
Jack Wilnot praises 5 stars for their advantages claims, specialization in the investment of commercial real estate, which allows
CrowdStreet to have a greater amount of investment from $10,000.
Capital is not everything and perhaps this platform is not ideal for beginners with little liquid assets, but certainly it is the very good because it seeks mostly to experienced investors with large amounts to invest.
4. Roofstock
Roofstock is a service which specializes in single family homes.
An investor can purchase a share in one rental house or in a collection of homes. It is a very good site for busy people seeking an income producing investment.
Steps to Get Started with Real Estate Crowdfunding
1. Research Platforms
Begin with a review of the available different platforms.
Focus on their credibility, kinds of investments they have to offer, and the least sum of money one can invest. Some platforms are limited to accredited investors only, while for others the majority is accessible.
2. Assess Your Risk Tolerance
How much risk can you take? Equity investments have high returns, but they are risky as well. Debt investments have lower returns which are predictable and therefore less risk is associated with such investments.
3. Choose Projects That Align with Your Goals
What are your preferences? Do you want to achieve short capital returns or you are focused on capital appreciation over a longer period? Choose projects that agree to your financial objective whether it is through rentals, capital growth, or both.
4. Diversify Your Investments
To lower the risk level, do not put all your eggs in one basket; rather invest in many properties and different asset classes. You may use one platform to buy residential properties and use another platform to buy commercial properties.
5. Keeping an Eye on Your Investments
While most of the crowdfunding platforms share their updates with respect to performance, it is still prudent to be active within the markets. Always keep an ear on the changes that are taking place in the real estate market as well as changes announced by the platform or the developers of the project.
Advantages of Real Estate Crowdfunding as Compared to Buying Property the Conventional Way
1. Decreased Expenses
With traditional real estate, investors must cover a range of expenses, including mortgage payments, property taxes, insurance, and maintenance.
Robert Foster a director of AltX Fund believes that these costs need not mire a real estate investor since real estate crowdfunding is designed as a low cost option that does not require the investor to bear operational costs.
2. Less Time Spent
Being a landlord entails more work than simply owning a piece of property as it involves putting in activities such as sourcing for tenants and also maintenance of the property.
With real estate crowdfunding, the properties are managed for you by the crowdfunding platforms which means you are at a passive level of investing.
3. Ability to Invest in Different Types of Properties
Investing through crowdfunding enables you to buy into types of properties that are out of reach on an individual basis for example commercial real estate, large apartment blocks or even industrial properties.
4. International Markets
Certain crowdfunding companies allow you to invest abroad and spread your investments along different countries capitalizing on the differences in markets.
Risks Associated with Real Estate Crowdfunding Some of the risks associated with real estate crowdfunding will be highlighted in the next three points.
1. Liquidity Risk
As a type of investment class, real estate is relatively illiquid.
After making the investment, it may be quite difficult to sell the asset during the life of the investment until the project comes to an end.
There are some platforms that have a secondary market for buyers to sell their by then An investment liquidity needs to be guaranteed.
2. Market Risk
The only things that affect real estate are the economy and the state of the housing market . When the economy is facing an accurate forecast to be bad in the long run, property prices are likely to be low, leading to lower returns.
3. Platform Risk
Investments may also be at risk in instances whereby the crowdfunding platform itself is either bankrupt, or there are laws that are against it. It is prudent to choose a platform that has a proven reliability outlay, while also having sound law descriptors.
Common FAQs
About Real Estate Crowdfunding
1. How much money do I need to start investing?
Most of the platforms support the idea of investment through giving their target clients a starting minimum amount ($500). But some may be having higher limits.
2. Is real estate crowdfunding safe?
The aim of the real estate crowdfunding platforms is to provide safe and secure investment opportunities, but there are always risks involved.
For the most case, risks can be mitigated by devising a platform with a solid reputation, and by diversifying the investment.
3. What are the returns like?
Returns vary based on the type of investment and the nature of the project.
The Investors in equity can benefit from both capital appreciation as well as rental income while debt investors earn monthly interest payments.
Returns with respect to investment in crowdfunding have been in the range of about 5% and 12% per year, however, this information is historical in nature and does not predict the future of investments.
Conclusion
There is a shift in the way investors view the real estate market. Crowdfundinggives an opportunity to invest in more places with fewer capital thresholds.
Today, real estate crowdfunding makes it easier for investors to generate passive income through rental properties, and appreciation without the hassle of managing tenants. With real estate crowdfunding, it is now even simpler to invest in real estate markets.
When combined properly with the necessary research, platform, and strategy, it is possible to break into the practice of investing in real estate. Real Estate Investment Crowdfunding: How It Works For Beginners.
Real estate has always attracted investors, however, investment in it was always capital intensive, and time and skill were prerequisites for successful investing.
Real estate crowdfunding is a game-changer as it allows investors to invest small amounts of money in different properties, thereby allowing individuals aspiring to earn passive income without the hassle of property ownership to invest.
In this guide, we cover everything that you need to know about real estate crowdfunding including its operations, benefits, and most importantly the risks associated with the model.
