The pros and cons of real estate crowdfunding

The pros and cons of real estate crowdfunding

Real estate crowdfunding is a new way to invest in real estate, and it has exploded in popularity in recent years. Crowdfunded real estate can be a lucrative type of real estate investment, but it isn’t right for everyone. With that in mind, here’s a beginner’s guide to investing in crowdfunded real estate deals that can help you determine if it’s a good fit for your risk tolerance and investment goals. Read on to learn the pros and cons of real estate crowdfunding.

What is real estate crowdfunding?

Real estate crowdfunding is among the hottest trends in property investing for the 2020s. Crowdfunding empowers property investors to leverage capital from a pool of like-minded people to buy into developments that would be otherwise unattainable.

In its simplest form, real estate crowdfunding is an investment strategy in which investors combine funds to purchase a property and share in the profits. These deals can take multiple forms. You could invest in a single-family home to fix and flip, for example. Or buy into a multi-family construction project and cash out when the completed development sells. You could even invest long-term in a multi-family building, earning a share of the monthly rental revenue for passive income.

The pros and cons of real estate crowdfunding

Pros

Comparatively low investment minimums

Buying a property on your own is expensive. On top of that, there are closing costs, renovation costs and ongoing maintenance costs or closing costs when you flip the home. But because crowdfunding pools capital from multiple investors, it comes with the benefit of low investment minimums. While exact investment minimums vary by project.

Portfolio diversification

Among the most notable benefits of real estate crowdfunding is that it allows you to engage in portfolio diversification. By diversifying your portfolio, you are essentially minimizing the risk that comes with making a singular investment by spreading that risk across numerous investments. If one of your investments happens to fail, your investment portfolio will be spread across numerous investments.

Accessibility

With the advent of crowdfunding, real estate investing has become considerably more accessible. Private real estate investments were previously exclusively open to high-net-worth individuals who possessed the necessary funds and connections. These are no longer impediments to entrance, thanks to changes in the law and the rise of internet crowdfunding sites. The real estate investment market’s entrance point is currently substantially lower than it has ever been.

Passive investment vehicle

Another attractive aspect of investing in real estate through crowdfunding is that it is a passive investment vehicle. This is in contrast to more traditional real estate investment vehicles, such as direct ownership. People who make traditional investments generally need to spend considerable time managing the property to make sure that it’s developed on time and according to specifications, and bear all of the associated risks. With crowdfunded real estate investments, you are investing with a third-party real estate developer or operator who does all that work.

Passive investment vehicle

Another appealing feature of crowdfunding real estate investing is that it is a passive investment vehicle. In contrast to more standard real estate investment vehicles such as direct ownership, this offers a unique opportunity. Traditional investors will need to devote a significant amount of time to managing the property to ensure that it is completed on time and according to specifications, as well as incur all of the risks that come with it. When you invest in crowdfunded real estate, you’re partnering with a third-party real estate developer or operator who takes care of everything.

Cons

While real estate crowdfunding has many advantages, it also has some drawbacks that you should be aware of before getting started.

Lack of control

If you want to have control over your investments, real estate crowdfunding may not be for you. Once you invest with crowdfunding, the development of the property will be managed by someone else entirely. However, more traditional forms of investment provide investors with the ability to manage the project.

Illiquid investment

Another downside of investing through crowdsourcing is that this form of investment is deemed illiquid. These are investments that are difficult to sell for cash if the need arises. A buyer will need to be found for the property you’ve invested in, which can take a long time and cause the value of the property to decline over time. It may be practically impossible to cash out on the investment in the event of an emergency.

Relatively lower returns

One negative is that your return will usually be smaller than what you would get if you invested directly in real estate through ownership. This is because the developer or operator with whom you are partnering must also make a profit. This is usually factored into your investment return.

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