When it comes to investing, including a real estate component can strengthen your portfolio. Putting money into a real estate investment trust (REIT) is one option but there can be downsides, such as hefty fees. Crowdfunding, on the other hand, offers more flexibility and you don’t need a lot of cash to get started. If you’ve never heard of this before, here’s the lowdown.
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How it Works
Crowdfunding for real estate is similar to any other type of crowdfunding. You get together with another person or group of people and pool your money together for a common goal. Everyone shares in the earnings as long as the investment prospers.
There are two ways to invest with real estate crowdfunding. First, you can put your money into equity shares in a specific property, such as a multi-family home, an apartment building, an office space or another type of commercial property. As an investor, you ultimately get to claim a share of any cash flow generated by rents or from appreciation if the property ends up getting sold.
The other way to get in on real estate crowdfunding is through debt investments. Basically, you and other investors are backing loans that are secured by a piece of real estate property. As long as the loan is being paid on time, you’ll receive monthly returns from the interest and any of the principal that hasn’t been paid.
Real Estate Crowdfunding Vs. REITs
Let’s talk a bit more about the difference between these two forms of investments. Unlike real estate crowdfunding, REITs function like stocks. You have the option of buying a stock from a brokerage company and having it traded on a public stock exchange.
You can also go for a non-traded REIT if you want to avoid the volatile price changes that can happen throughout the day in the stock market. Since you’re choosing to invest in a particular company, you really have no say in the type of real estate they decide to stick your money in. By investing in real estate crowdfunding instead, you can choose whether to invest in a particular property or look elsewhere.
In fact, with real estate crowdfunding, you can work one-on-one with real estate developers and pick the properties that you’re most interested in. Plus, you can get a clear sense of the kind of risk you’ll be taking on. With an REIT, you might not actually know how your investment is expected to perform until months after you’ve handed over your money. And by then, it’ll be too late to do anything.
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Why Invest in Real Estate Crowdfunding
Real estate crowdfunding is an attractive alternative for investors for a couple of reasons. First, you don’t have to be fabulously rich to do it. With certain private real estate investments you might need six figures to get started, but crowdfunding is open to people who may only have $5,000 or $10,000 to work with.
Another plus is the lack of high fees that are usually associated with other investments such as REITs. Sales commissions and fees for REITs can run as high as 10%, which adds up to a substantial amount of earnings that you’re handing over. When you invest in real estate through a crowdfunding platform, the services fees are typically much lower.
Aside from the cost and the lower minimum entry charges, crowdfunding allows you to invest in real estate without having to do any heavy lifting. Your investments are managed for you so you don’t have to play landlord to anyone, which can be time consuming to say the least.
What Are the Drawbacks?
Like anything else, there are some potential downsides to real estate crowdfunding. Since you’re investing in actual properties, you don’t have the ability to liquidate and easily sell your holdings the way you would if you owned shares in a REIT or an individual stock. That could be a problem if you’re not comfortable tying up all of your cash in one place.
You could also hit a snag if you’re investing in debt and the loan goes into default. If that happens, it’s possible to lose everything you’ve put in if the crowdfunding platform you’re using isn’t able to recover what’s still owed on the balance.
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Real estate crowdfunding is a relatively new phenomenon which means it doesn’t have a lengthy track record yet as far as returns go. While the industry as a whole sees it as promising, there’s no guarantee that you’re going to see a huge payoff. That being said, if you want to expand your portfolio to include real estate with a minimal investment, crowdfunding could be worth taking a look at.
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