crowdfunding for real estate projects is a method of funding a real estate project using a small amount of funds from a large number of investors.

The advantage of crowdfunding for developers is that they have access to their colleagues, friends, family, as well as the general public via online social networks like LinkedIn, Facebook, and Twitter as well as crowdfunding websites.

In this way, the real estate developers can broaden their investor base and fund projects that might otherwise not be able to be funded through more traditional means.

Crowdfunding gives investors access to a much broader range of investment opportunities and allows them to spread their investment dollars over a greater number of investments, thereby achieving greater diversification.

In spite of the fact that real estate crowdfunding has existed in some form for many years, it has recently become increasingly popular due to the proliferation of online crowdfunding platforms.

crowdfunding for real estate projects

crowdfunding for real estate projects

In order to be successful with real estate crowdfunding, you need to select the right crowdfunding platform.

You can take advantage of crowdfunding to make a real estate investment with little to no money, gaining access to a broader market. Fundrise, Origin Investments, and RealtyMogul are some of the more popular crowdfunding platforms.

Increasingly, the real estate industry has embraced crowdfunding, which has led to the refinement of the process in recent years and the creation of more viable platforms.

The crowdfunding process is a great way to engage in real estate investment without investing a significant amount of money, but you should be aware of its advantages and disadvantages before you participate.

Here are some pros and cons of real estate crowdfunding, which can help you decide whether or not this investment option is appropriate for you.

Read more: How To Start Investing In Mutual Funds?

Crowdfunding for real estate projects

1. Portfolio Diversification

crowdfunding for real estate projects

crowdfunding for real estate projects

Real estate crowdfunding has the notable benefit of allowing you to diversify your portfolio.

Through diversifying your portfolio, you minimize the risk associated with making a single investment by spreading it across multiple investments. Your investment portfolio will be made up of numerous investments if one of them fails.

In order to illustrate the benefit, you could invest $100,000 in investment A or invest the same amount in equal increments of $20,000 across investments A, B, C, D & E. Investing only in investment A would result in a loss of $100,000. However, if you had spread that amount over five investments, and one failed, you would only lose $20,000.

2. Accessibility

crowdfunding for real estate projects

crowdfunding for real estate projects

Crowdfunding has made investing in real estate much more accessible. Traditionally, only high-net-worth investors had access to private real estate investments.

Law changes and the proliferation of online crowdfunding platforms have eliminated these barriers to entry. Real estate investment has never been easier to enter than it is now.

3. Geographic Diversification

crowdfunding for real estate projects

crowdfunding for real estate projects

The ability to diversify your portfolio is one of the top reasons to invest in real estate through crowdfunding, but you can also diversify your investments geographically.

Geographic diversification is crucial since real estate markets can perform differently in different parts of the country.

The real estate market in one city may be strong, but the market in another location may be experiencing a downturn.

It is possible to receive a negative return if you invest all of your money in one market simply because of issues unique to that market and which don’t affect the broader market. Making real estate investments via crowdfunding gives you the choice of where to invest.

Read more: Investing in Mutual Funds For Beginners

4. Passive Investment Vehicle

crowdfunding for real estate projects 1 1

crowdfunding for real estate projects

Another attractive aspect of investing in real estate through crowdfunding is that it is a passive investment vehicle as opposed to traditional real estate investment vehicles like direct ownership.

Traditional investors typically spend a lot of time managing the property to ensure it is developed on time and according to specifications, and bear all the risks associated with it.

Crowdfunded real estate investments involve third-party developers or operators doing all the work for you. You expect the developer or operator to complete the work on time and within budget.

As a result, you won’t have to deal with the frustration of managing the property. This, in turn, allows you to focus on other investment opportunities.

5. Small Investment Size

crowdfunding for real estate projects 3

crowdfunding for real estate projects

If you have never been able to invest in real estate because of how much money is typically needed for a traditional investment in real estate, crowdfunding offers you the opportunity to become a real estate investor because of the small investment size requirements.

The average investment on some crowdfunding platforms is just $500. The amount of money you need to invest in real estate is no longer the tens of thousands or hundreds of thousands that are typically needed to purchase a home. If you are new to real estate investing, a smaller investment amount allows you to “dip your toe in the water” or diversify more.

How is Real Estate Crowdfunding Disadvantageous?

1. Lower Relative Returns

While crowdfunding for real estate projects it can be highly advantageous, there are also some disadvantages that should be considered before investing.

The disadvantage is that your return will not be as high as if you owned the real estate directly. That’s because the developer or operator you’re investing with needs to make money as well.

Generally, your investment returns reflect this. However, the return you ultimately receive will depend on many factors, including, without limitation, whether it is a debt investment or an equity investment. An equity investment typically yields a return of 18-23 percent while a debt investment yields 8-10 percent.

2. Illiquid Investments

Investing through crowdfunding also has the disadvantage of being illiquid. In the event of a financial crisis, these investments cannot easily be sold for cash.

In order to sell the property that you invested in, you’ll need to find a buyer, which can take a long time and may lead to a drop in value over time. An emergency could make it nearly impossible to get a return on the investment.

3. Lack of Control

Real estate crowdfunding is not for you if you want full control over your investments. Investing with crowdfunding ensures that the development of the property will be handled by someone else.

On the other hand, traditional forms of investment allow investors to manage the project themselves.

The traditional form of investment will give you more control over the development process, which allows you to typically get the returns you are looking for if you have previously managed large projects.

How to Get Started with Real Estate Crowdfunding

crowdfunding for real estate projects

crowdfunding for real estate projects

You will need to choose a crowdfunding platform to join if you want to invest in real estate through crowdfunding.

Different crowdfunding platforms focus on different areas. The minimum investment amount is one of the principal requirements you need to consider when selecting a crowdfunding platform.

Some platforms have investments as low as $500, others require investments as high as $100,000. Most platforms require investments around $5,000.

There is the option to put your money into either an equity or a debt investment on many of these platforms.

When you make an equity investment, you become a direct owner of the property. If the project is sold, returns are in the form of equity shares of the total rental income.

In the case of debt investments, you will invest directly in a loan. Typically, these loans are secured by underlying real estate, which serves as collateral, and will be repaid on a monthly or quarterly basis with interest, after which a portion of the proceeds will be provided to each investor.

Once you’ve selected the right platform, it’s important to note that each works differently. An account must first be created before you can invest. If you invest $500-$1,000 in a platform like Fundrise, you can invest in 5-10 projects, each of which you can choose yourself.

In most cases, you can get started within minutes with these platforms. The duration of these investments can vary from 1-10 years.

The Bottom Line

Crowdfunding and investing in real estate may not be for everyone, but it is a great way to get started in the industry without spending a large sum of money up front.

When less money is invested, the risk is often lower. To get the most out of crowdfunding, you need to understand the many benefits and drawbacks that come with it. Based on this information, you can create a risk assessment for your investment.

*DISCLAIMER: The statements and opinions in this article come from AB Capital alone.

AB Capital makes no representations, warranties or guarantees as to the accuracy or completeness of the information provided in this article. We do not intend for this article to be construed as an offer or solicitation to sell, buy, or invest in any security.

Information about additional investment opportunities will only be provided to individuals who meet all investor qualification requirements.

Offerings to sell or solicit offers to buy a security can only be made through official offering documents which include important information about risks, fees and expenses.

This article does not offer legal, financial, investment, or tax planning advice, or an alternative to thorough due diligence and sound independent judgment.

When considering a trust deed investment, it is suggested that you consult with someone you trust, such as a real estate broker, an attorney, an accountant, or an investment company under the Investment Company Act of 1940.

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