Real estate can be one of the most financially rewarding investments — however, it typically requires a large sum of money as capital. Most investors need to work with lenders to get that capital, and they also need to put in a lot of effort to find, build, and rent or sell a property before they can enjoy their profits from real estate investing.
But did you know that average investors, regardless of their knowledge and skills in real estate investing, can now invest in real estate without having to go through all this fuss? This can be done through real estate crowdfunding, which is a new way to invest in real estate.
Crowdfunded Real Estate Investing: What It Is & How It Works
Crowdfunded real estate investing allows individual investors to pool their financial resources to invest in a specific real estate deal — even in big properties which they wouldn’t normally be able to afford on their own.
Experienced real estate professionals may know of a possible real estate opportunity but they don’t always have the necessary capital to fund the investment completely. When this happens, they usually open the investment into a crowdfunding opportunity to raise funds from other investors. Individual investors, even those who don’t have hands-on experience in actual real estate investing, are allowed to contribute money as financial investments to help execute the project.
Real estate crowdfunding consists of two key players:
- The sponsor – this is the person or company that looks for the property, identifies its opportunity, plans the project, pools the funds needed to acquire the property and manage the project, and takes responsibility for renting or selling the property.
- The investors – they are a group of individuals who invest their money to fund most of the required capital. In exchange, they get a share of whatever profits the project produces based on their agreement with the sponsor.
The sponsor finds investors to raise the needed capital for the project through a crowdfunding platform. The crowdfunding platform acts as an agent or a middleman between the sponsor and the investors — it helps find the perfect match for both parties.
Online crowdfunding platforms, like Crowdestate, make crowdfunded real estate investing more accessible to most average investors. They also provide real estate professionals with the ability to raise money for big projects by connecting them with a wide-range network of individuals who share similar goals.
The crowdfunding platform will:
- ensure a deal meets certain standards
- do extensive background information
- advertise deals to potential investors and due diligence on the projects
- ensure that investors meet the requirements for investment
- set the minimum required investment
- deal with regulatory issues
- collect investments from the investors on behalf of the sponsor
Pros & Cons of Real Estate Crowdfunding
As with any type of investment, real estate crowdfunding comes with several benefits and drawbacks. It’s important to know the pros and cons of crowdfunded real estate investing and take them into consideration so you can make an informed decision.
Pros of Real Estate Crowdfunding:
- Real estate professionals can get the funds they need for big projects without taking a huge amount of loan from financial institutions
- Average investors can have access to real estate investing without the need to shell out a huge amount of capital
- People who don’t have skills in real estate (those who don’t know how to find a property, arrange for renovation, and rent or sell it) can still invest in real estate
- It allows investors to benefit from the potential of real estate investments without the headaches of actually becoming a landlord or dealing with renovations and sale of the property
- More people can participate because of lower minimum required investment
- Investors can invest in properties located in different geographical regions where there is a growing demand
Cons of Real Estate Crowdfunding
- This can be riskier than other types of equity investments as most crowdfunded real estate deals are backed by a single asset
- They are not liquid investments and you cannot just decide to withdraw or sell your investments whenever you want
- This is a long-term investment — it may take a longer time before you can get an income from your investment
When to Consider Real Estate Crowdfunding
Crowdfunded real estate is a high-risk, long-term, and illiquid type of investment. However, this is also a kind of investment with the potential for higher returns. If you are willing to take more risk for better returns, and you don’t mind having your money invested for several years, then it’s prudent to include crowdfunded real estate to your investment portfolio.
Calculate your risks by only investing the money that you won’t be needing in the near future. Also, make sure to choose the best crowdfunding platform that you can trust. You should weigh your options carefully to find something that fits your personal financial goals.