Once the JOBS Act was passed in 2012, the concept of crowdfunding exploded in popularity, allowing money to be raised for everything from small businesses to real estate developments.
Once the JOBS Act was passed in 2012, the concept of crowdfunding exploded in popularity, allowing money to be raised for everything from small businesses to real estate developments. What exactly is crowdfunding, and is it a good option for you as an alternative to investing in traditional real estate?
Crowdfunding is the ability to raise money through small contributions from multiple individuals. The concept of crowdfunding has become more widespread thanks to the extensive adoption of online usage and social media. Companies such as Kickstarter have managed to raise millions of dollars for all types of projects.
Although real estate is relatively new to crowdfunding, the potential in this space is massive. With crowdfunding, it becomes possible for investors to gain access to a wide variety of properties using an online platform. Investors typically invest small amounts of money, sometimes as little as $1,000, into properties. Our comprehensive guide will take you through the evolution of real estate crowdfunding. From the advantages, to the myths, to the basics of getting started, and practical tips to move in from amateur to expert. First off, let’s focus on the top 3 advantages of real estate crowd funding.
Real estate crowdfunding offers investors a number of benefits, particularly when compared to purchasing a rental property or investing in a real estate investment trust, also known as a REIT.
The information regarding an underlying investment can often be limited with a REIT. This can make it more challenging to determine whether the investment is sound. Crowdfunding platforms typically research each deal before making it available so prospective investors have as much information as possible to make the most educated decisions.
In the past, in order to invest in a real estate deal, an investor would often need to have tens of thousands of dollars. Crowdfunding has lowered the bar, making real estate investing far more accessible to the average investor. The minimum investment for many deals is $5,000 or less.
Investors have a far greater opportunity to diversify their investments with crowdfunding because they are exposed to entirely new asset classes.
The advantages of real estate crowdfunding will only continue to grow as the market matures. You have to keep in mind that this is a relatively young business practice. Now that we covered some of the advantages, let’s take a deeper dive into the myths around crowdfunding your next real estate deal.
Many times, investors are hesitant to become involved in real estate crowdfunding due to a number of myths that have been perpetuated. Because of regulatory changes as well as recent developments in technology, it has become possible to connect investors to real estate deals in ways that were never before possible. The entire process is extremely convenient, efficient, and fast. For those who are hesitant to get involved in crowdfunding, it’s important to understand the truth about this new approach to investing and raising capital.
There is sometimes a misconception that the only deals available on crowdfunding sites are bad deals because their principals are not able to raise capital anywhere else. The truth is that the decision to raise capital on a crowdfunding site has no connection to quality. Many project sponsors choose to raise capital on a crowdfunding site because it offers faster access to capital.
It should always be understood that, as is the case with anything, some crowdfunding platforms naturally will be better than others are. Some sites simply will not conduct as much due diligence as they should. Other sites will be quite diligent about researching deals. This is why it is essential that you take the time to select the real estate crowdfunding site you will use carefully.
The number of deals offered on a site does not indicate the success of the platform. Simply because one platform offers a large number of deals does not necessarily mean those deals are of a high quality. This could simply mean that particular platform conducts less screening. Instead of looking for quantity when researching a platform, look for quality.
A reputable platform will always ensure that a transaction is structured in such a way that investors are protected. This means that a bankruptcy contingency plan should always be in place.
Don’t let fear hold you back from dipping your toes into real estate crowdfunding. Sure, there is risk involved in any path you decide to take. It’s risky to hand the bank $40,000 USD of your hard earned money for the 20% deposit they require on that duplex you’ve been eyeballing as well. What if you can’t find tenants quick enough to cover the mortgage? What if this, what if that? The key is to take calculated risks and realize that fear mongering is prevalent in every industry. Often times it’s the investors making the most money at something such as crowdfunding whom are perpetuating the fear amongst the general investor population. What better way to keep the competition out than instill fear into the process?
With real estate crowdfunding, investors are able to take advantage of certain tax breaks, including depreciation. In the past, these tax benefits were only available if you owned an investment property on your own. We suggest that you speak with your accountant about all of the specific tax advantages. We’re not qualified to speak about the specifics, but do know that certain tax break exists in this realm.
Now that we covered the primary advantages, the myths, and the fact that you can benefit from a tax perspective – are you convinced that real estate crowdfunding might be something to consider? If so, it’s important to understand that there are two different approach with real estate crowdfunding.
With equity investments, investors are able to make investments in residential or commercial properties. In exchange, investors receive an equity stake in the relevant property. Each investor will also share part of the rental income generated by the property.
In this type of investment, investors invest in mortgage loans related to specific properties. A share of the interest is paid to investors as the loan is repaid.
In determining whether equity investments or debt investments are the best option, it’s important to understand that equity investments tend to provide a larger return potential. This is because the profitability of debt investments can be somewhat limited due to the interest rate on the loan. Conversely, equity investments do carry a greater amount of risk. It should also be considered that equity investments usually have a longer holding period.
Now that the theory is out of the way, let’s talk about actionable tips that will take into to the discipline of real estate crowdfunding. Knowledge is Power, but Applied Knowledge will take you from Point A to B. Our recommendation is to start small and put these practical tips into action quickly.
Once you have made the decision to participate in real estate crowdfunding, it’s important to know how to proceed to ensure the best possible experience. In our research, we found 8 actionable tips that will put you on the right track.
Before choosing a real estate crowdfunding platform, take the time to do some research. Be aware that real estate crowdfunding platforms can differ. Because of this, some platforms may be a better fit for your needs than others are. Taking the time to research different platforms can help you to identify both the strengths of weaknesses of each.
While it is true that most platforms will spend some time researching investments, it’s also important that you review them on your own. Before you make the decision to invest in a deal, speak to a financial advisor about the specifics of the deal to help identify any prospective issues.
Bear in mind that the liquidity schedules for real estate deals can vary from one property to another. Make sure you understand how long you will be locked into a prospective deal before you make an investment decision.
Real estate investing can be an excellent way to diversify your investments, but it’s also important to make your risk is also diversified.
Be sure to research the sponsor behind a deal before making a decision. For instance, what is the sponsor’s track record? What other types of projects has the sponsor handled? Does the sponsor have experience with handling this specific type of project? How long has the sponsor been in business?
What assumptions are the sponsor and the platform making? Keep in mind that poorly based assumptions can lead to projections that can be quite unrealistic.
Make sure you understand whether you are classified as an accredited investor and the laws that apply to accredited investors. According to the SEC, an accredited investor is an individual with an annual income of at least $200,000 during each of the last two years or who has a joint income with a spouse of more than $300,000 during those years. An accredited investor may also be defined as someone who has a net worth or joint net worth with a spouse greater than $1 million, not including the primary residence.
All projects are unique; therefore, it’s vital that you understand what will take place in the event something should go wrong. When possible, try to have an attorney who is familiar with real estate investments review the details of the deal.
The aforementioned actionable tips will help guide you, but what about raising capital quickly? How can you raise money for that next apartment complex deal? Here’s how:
While real estate crowdfunding offers an array of benefits for investors, it can also be advantageous for borrowers. For borrowers who need to raise capital for development projects, crowdfunding offers the opportunity to gain access to capital with fewer challenges and within a shorter amount of time. Additionally, crowdfunding also provides the benefit of lower overhead costs, particularly when compared to borrowing from a traditional bank. Here are 4 primary actions that you should take initially.
With the number of crowdfunding platforms increasing at such a rapid rate, it’s important to take your time and choose a platform that is right for your needs. Among some of the most popular platforms include RealtyMogul, RealtyShares, Patch of Land, and iFunding.
Once you have selected a platform, the next step is to provide as much information as you can about your project. This is done using an online application form, which allows prospective investors to review your opportunity.
Once your application is approved, you will need to provide additional information regarding your project. In addition, all principals on the project will need to submit to a credit check and background check.
The next step is to present your opportunity to accredited investors.
Every investment opportunity is different, so you should expect it to take the time to complete the funding process. While it’s not uncommon for debt investments to be funded quickly, sometimes in a day or less, equity investments can take longer to fully fund.
Experience is critical when choosing a prospective real estate crowdfunding platform. Below are some of the more popular real estate crowdfunding platforms.
This tech-savvy platform provides investors with a minimum investment opportunity of only $5,000. Accredited investors are able to browse through multiple pre-screened commercial, residential, mixed-use, and retail properties. Since projects are presented to investors via the platform, borrowers can benefit from a fast-tracked process for raising capital.
This platform is known for connecting accredited and institutional investors with an extensive selection of equity and debt real estate investments. In addition, this platform offers a choice of equity and debt financing for borrowers. The minimum investment on RealtyMogul is $5,000.
This peer-to-peer real estate lending platform matches institutional and accredited investors who are looking for short-term, high-yield investments to borrowers seeking funding sources for rehabbing real estate properties.
This platform provides single-family residential projects and commercial retail projects. The minimum investment is $5,000.
This platform has proven to be particularly successful, largely because it was designed by a combination of tech gurus and real estate professionals. Investments through this platform tend to be professionally managed commercial projects.
This is one of the largest crowdfunding platforms in the world today, and it is also extremely popular. Prospective investors should know that this platform tends to focus on larger commercial projects. Compared to most other crowdfunding platforms, Prodigy Network offers a higher minimum investment level.
Investors searching for an entry-level platform will find Fundrise to be a good option. This is largely due to the lower minimum investment level, which allows investors to begin with as little as $100. Many of the projects handled through this platform are smaller in scope compared to projects available through other platforms due to the minimum required investment. Even so, investors who are just getting started may find the small-scale projects to be quite rewarding.
Among peer-to-peer lenders, PeerStreet is one of the most well-known platforms. Using a data-driven approach, this platform is able to focus solely on debt financing. The lowest investment level on PeerStreet is $1,000.
Real estate crowdfunding has become known for revolutionizing the way in which individuals invest in real estate as well as how borrowers raise capital for projects. With the ability to remove some of the most challenging hurdles to real estate investing while also introducing cutting-edge technology, crowdfunding is breaking new ground for investors as well as borrowers.