What is Real Estate Crowdfunding? Beginner's Guide 101
Real estate is a valuable asset to have in your portfolio as a dedicated investor. But sometimes the money and capital required to start makes it seem difficult for many beginner investors. The constant need for supervision and maintenance of the property is also a challenge.
Meet Real estate crowdfunding.
Real estate crowdfunding is an innovative and convenient way to invest in the budding market while avoiding these two downsides. (I’ll break down the basics for you).
If you already dabble in the stock market and other forms of low to medium-risk investments, making the transition to real estate will be easy for you. As long as you understand the basics of real estate crowdfunding, you will have a high chance of success in the market.
How do I start crowdfunding in real estate?
Crowdfunding in real estate is a reliable method to gain access to substantial revenue-generating projects. If you are considering entering this market, the best way to do so is as a real estate crowdfunding investor.
There are several companies and even individuals who sponsor real estate projects by consolidating investor capital contributions. You can find these opportunities through crowdfunding platforms.
These platforms serve as the link between investors and sponsors. Unlike high-profile projects, which can cost individual investors up to hundreds of thousands of dollars, real estate crowdfunding projects can be accessed for as low as $500.
Investors receive dividends within stipulated time-frames, quite similar to the stock market model. Real estate crowdfunding is a method of purchasing a stake in commercial development and gaining profits through rental and sales income.
Types of Real Estate Crowdfunding
There are four forms of real estate crowdfunding. They include; Debt Investment, Local Crowdfunding, Preferred Equity Investment, and Common Equity Investment.
If you are new to the real estate industry or just weary about the problems that come from high-risk crowdfunding programs, I suggest you go with Local crowdfunding. Local crowdfunding is miles better than the others due to its simplicity. It works based on a donation system, i.e., when people give you money for nothing in return.
Let's say you decide to run a crowdfunding campaign for a new real estate project; you can seek help from individuals such as your friends and family members for monetary support, making it clear that it's donation-based and solely for the growth or success of your real estate project.
Other forms of crowdfunding include;
Debt Investment: Debt Investment is a form of real estate crowdfunding that the investors pay towards financing a property loan.
Preferred Equity Investment: Although it has the word preferred in it, this form of funding is quite complex. In preferred equity real estate crowdfunding, the investors hold equity interest in a sub-investor company that invests in the property developer's company.
Common equity investment: Common equity is quite similar to preferred equity because they follow the same investment mode. However, in common equity, the payout is sent out quarterly because it has the highest risk factor of the four types of real estate crowdfunding.
Benefits of Investing in Real Estate Crowdfunding
There are massive benefits to investing in real estate crowdfunding. Some of these benefits are listed below:
● Low initial investment minimums
● Portfolio Diversification
● Higher ROI than traditional investments
● Long-term investment growth.
Low Initial Investment Minimums
The initial investment required in real estate crowdfunding is significantly lower than any other form of investment available. There are several platforms for real estate crowdfunding, and they individually set the minimum amount of capital required. However, this figure rarely goes outside the $500 - $5,000 range.
Diversification
Real estate crowdfunding allows investors to spread their capital across various properties, providing investment security for low capital accounts. Beginner investors gain access to high-value projects, and developers have a wider pool of project finance.
Higher Return on Investments
Many real estate crowdfunding platforms function as REITS; Real Estate Investment Trusts. REITs have the legal obligation to payout 90% of their taxable income as investor profits. For the investor, this means you get to cash out big time from your venture.
Long Term Growth
Long term growth means that your income as an investor will grow marginally over time due to the real estate market’s appreciating nature.
Disadvantages with Real Estate Crowdfunding
Real estate is not all rosy, and even in crowdfunding, there is a downside. Many crowdfunding platforms charge annual fees that can run between 1-3% of your capital. It is also not advisable to use this investment method if you are not looking at the long-term. It can take forever to get your money back if you decide you are no longer interested and would like to sell off your shares.
FAQs on Real Estate Crowdfunding
Is real estate crowdfunding a good investment?
Yes, real estate crowdfunding is an excellent investment. You gain access to higher dividends, a diversified portfolio, and you also enjoy capital growth over the long term as the property appreciates.
Can you make money crowdfunding real estate?
I have good news for you! You can absolutely make a decent side income from investing in crowdfunded real estate. Many investment platforms will offer you a fixed percentage of interest either monthly, quarterly, or annually.
How much should you invest in crowdfunding?
The answer to this question might vary but many platforms stipulate between $500-$5,000 a minimum capital. However, the minimum investment can run as high as $25,000 (depending on which investment form you go for). If you are not very familiar with REITS, you should start small and build up your capital as you gain more experience.
Best Real Estate Crowdfunding Platforms
Some of the most popular real estate crowdfunding platforms are;
● Fundrise
These companies are known for their competitive interest rates, low minimum capital, and strong dividend return rates.
Overall, real estate crowdfunding is one of the best ways to get your feet wet when you are new to the real estate market. The low capital requirement and corresponding high-interest rates make it a valid option for both beginner and veteran real estate investors.
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