Pros and Cons of Real Estate Crowdfunding
Crowdfunding as a concept belongs firmly to the age of the internet. Got an idea for a business? Go online, announce it and get small investments from a variety of people. Savvy real estate investors have found that the concept works for acquiring properties as well. While at first glance the strategy seems a lot like taking part in a Real Estate Investment Trust, (REIT) there are some key differences. If you’re considering real estate crowdfunding as a means to get started as an investor, here are some of the things you should bear in mind.
On the upside, crowdfunding gives investors the opportunity to choose specific projects or properties with which to become involved. With a REIT, your money goes into a large pool and is then distributed over many different projects and properties. With crowdfunding, you’re typically investing in a single property. This makes it easier to analyze the investment and decide if it is a good fit for your long-term goals.
Another advantage is the value of your investment does not fluctuate with the stock market, which can often be influenced by factors having little to do with the properties themselves. If the roller coaster ride of the stock market can be an issue for you, crowdfunding is a viable alternative. You can also typically get in on a crowdfunding deal with a smaller investment. This makes it easier to reap the benefits of being a real estate investor, as the capital requirement is much smaller than purchasing properties outright on your own.
Also capital related, crowdfunding gives you the ability to diversify your investment portfolio with less capital. If you already have money in stocks and bonds and you’re looking to get into real estate for the solidity it has typically represented, crowdfunding gives you the capability of doing so at smaller investment levels. Also, because it takes less money, you can spread your risk over a number of different projects. Instead of investing $100,000 as a down payment on one property, you can invest $25,000 in four different properties.
On the other side of the coin, because you don’t own anything outright, it becomes more difficult to scale your portfolio as quickly as you could if you were holding actual deeds, rather than shares in a crowdfunded project. You’ll also have very little control over the direction of the investment and must rely upon the acumen of the developer or the property manager to grow the venture. Also, keep in mind; your investment is not secured as it would be in a REIT.
Another consideration, crowdfunded projects are not required to distribute 90 percent of the rental income to investors the way REITs are. If you’re looking to see large yields on your money, crowdfunding may not be able to support your goals as readily as an investment in a trust.
And finally, in exchange for insulation from volatility, you’ll forego liquidity. Because investments in REITs are publicly traded financial instruments, you can sell out of them at any time and liquefy your investment. With crowdfunding, you have to wait until the deal has run its course to regain access to your capital. What’s more, because crowdfunding isn’t as heavily regulated as REITs, it’s a bit riskier.
As with any investment, due diligence is of paramount importance before committing your money to a project.
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