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Crowdfunding has taken off since the passage of the JOBS Act in 2012. In addition to being a way to fund personal causes, crowdfunding has opened up new avenues for investors who want to put their money into real estate or startups. As an investment tool, crowdfunding has some advantages. But it has its drawbacks as well. Before wading in, you need to know what to expect.

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The Pros

1. You Don’t Need a lot of Money to Get Started

One of the most attractive features of crowdfunding platforms is that they set the bar relatively low when it comes to minimum investment thresholds. With real estate crowdfunding, for example, you might be able to invest in a property with as little as $1,000. Certain peer-to-peer lending sites allow investors to fund loans in $25 increments.

When you compare that to something like mutual funds, which may require a minimum buy-in of $3,000 to $10,000, crowdfunded investments look like the better option if you can’t afford to part with a lot of cash all at once.

2. You Could Earn Above-Average Returns

Although its track record is relatively short, crowdfunding has the potential to be a lucrative bet for investors. Depending on the type of investment involved, it’s possible to match the market or even beat it. In the real estate sector, for instance, you may be able to watch your investments grow and see annual returns of 12% to 14%. The more risk you’re willing to take on with crowdfunding, the more rewards you could reap.

Related Article: What Is Real Estate Crowdfunding?

3. Crowdfunded Investments Are More Transparent

Pros and Cons of Crowdfunded Investments

Crowdfunding has injected a new degree of transparency into investing that you don’t always get with other kinds of investments. If you’re investing in a startup, for example, you can get the full rundown on the company before ponying up any cash. With a mutual fund, you may be limited to the information that’s included in the prospectus or your quarterly statements. Having that extra knowledge about an investment can make it easier to decide whether it’s a good bet.

The Cons

1. Returns Aren’t Guaranteed

Like any other investment path, crowdfunding is not risk-free. Take equity investing in startups, for instance. The idea is that you invest in a company and in exchange, you receive ownership shares.

Assuming that the company you’ve invested in takes off, you could sell those shares for a profit down the line. That sounds great. But you’re taking a huge gamble because if the company flops, your shares (and your investment) could be worthless.

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2. Crowdfunding Can Be a Long Game

Pros and Cons of Crowdfunded Investments

If your goal is to generate returns in a short period of time, crowdfunding likely isn’t going to be a good fit. Depending on the kind of investment you choose, it could take months or even years for you to get any traction. Ultimately, you have to decide what kind of time frame you’re comfortable with to gauge whether there’s room in your portfolio for crowdfunded investments.

The Bottom Line

The crowdfunding industry is on track to expand even more in the years ahead, especially now that the SEC is allowing non-accredited investors to fund crowdfunded investment vehicles. If you’re thinking about incorporating crowdfunding into your investment strategy, it’s a good idea to research the particular niche you’re interested in carefully. It’s also important to vet crowdfunding platforms thoroughly to find a reputable company that won’t charge excessive fees.

Photo credit: ©iStock.com/LuckyBusiness, ©iStock.com/Lorraine Boogich, ©iStock.com/Pamela Moore

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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