Now, it’s a lot easier for real estate developers to raise capital for commercial projects within days… or even minutes! This is made possible through real estate crowdfunding.
The concept is simple. Someone—in this case, the sponsor—has an idea but doesn’t have enough financial resources to turn that idea into reality. They turn to social media or crowdfunding platforms online to look for potential investors. This pool of investors each invests small amounts that pile up to raise the once exorbitant capital.
The sponsor works on the asset, which makes the investment a source of passive income for the investor.
It’s safe to say real estate crowdfunding has become a booming industry, thanks to the demand for alternative investments and a strong US economy. But for investors, how do they get started? And more importantly, how do they ensure they’re betting on the right horse?
Real Estate Crowdfunding—What’s the Catch?
Before you start betting a couple of dollars to a handful of investments, take heed.
While people of all income levels are welcome to invest (based on Title III of the Jumpstart Our Business Startups (JOBS) Act), there’s a cap on how much capital a sponsor can accept through crowdfunding annually.
Investors can only provide 2,000 dollars per year, which amounts to 10 percent of their yearly income.
This is a game-changer as numerous players and smaller investors are able to enter the field through the JOBS Act. But what are the pros and cons in investing via real estate crowdfunding?
What Investors Can Expect
Obviously, there are risks for both sides as there are advantages. For investors, here are the pros and cons to watch for:
Pros
- Investors can enter the real estate market with small amounts of investments.
- They have a say in the development process as they get to work closely with real estate developers.
- They have the freedom to choose which projects to bet their money on, and thus, be more strategic about it.
- There are a myriad of high-potential projects to choose from with the right platform.
- Low minimum investment amounts are allowed for nonaccredited investors.
- They’re able to spread the risk in their investment portfolios.
Cons
- Investors need to be US accredited.
- There’s a higher risk in investment default compared to peer-to-peer lending or direct real estate investment funding.
- There is a lack of liquidity with the absence of a secondary market, which makes it difficult for investors to sell their assets.
- As with any real estate investments, investors can lose money if the market goes south.
How to Get Started
Investors need to give due diligence when researching for the right sponsors, projects, and crowdfunding platforms to invest in. With this emerging trend, a lot of companies are still testing out multiple business plans and might not have reached stability.
The goal is to find a competent sponsor that already has years of experience in real estate. After all, crowdfunding investments are considered higher risk. There’s no guarantee an investor gets a high return as originally planned.
When looking for sponsors, it pays to tick off all the right boxes:
- Strong industry experience and knowledge in the geographic area
- Positive past performances and feedback
- Solid reputation among peers and their line of business
- Stellar results after a background check
While reputable crowdfunding platforms conduct their own background checks on their sponsors, including criminal and credit history or past or pending litigation, there’s no harm in doing an additional Google search.
Aside from digging information on potential sponsors, investors should also investigate the crowdfunding platform they’re going to use. Here are basic qualities that a reliable crowdfunding platform should possess:
- Has a sterling reputation and boasts successful business experiences
- Delivers excellent customer service even after the deal is fully closed
- Values transparency above all else (If an investor doesn’t understand where their money goes, then they should find someone that helps them understand better.)
The Takeaway
Real estate crowdfunding is slowly becoming a revolution. It’s already making impressive traction among serious investors. While the risk is considerably higher than traditional investments, it helps investors diversify their portfolio, not to mention gain competitive returns.
