Traditional real estate investing is characterized by the injection of large amounts of capital from one or a few major investors. The system has worked well for a very long time, but the risks for investors are quite large, many projects fail to receive funding, and small investors are shut out entirely. If the risk could be spread out among many more investors, each contributing just a small amount of capital, then the risk to any one investor would be relatively small.
This is where crowdfunding comes in to play and, thanks to the Internet, it is quickly becoming a staple of the way artists, tinkerers, and dreamers get the capital they need to recognize their dreams. Will it work for real estate though?
Real Estate Crowdfunding
According to real estate crowdfunding site iFunding, there is no shortage of small-scale investors looking for a piece of the action in real estate. In real estate crowdfunding, investors are given an equity stake in a property based on how much money they put up. In some cases, the entry point is as low as £5,000 (some U.S.-based services have entry prices as low as $100) . The use of crowdfunding makes it possible for small-scale investors to hold a piece of premier real estate. The net result is that more properties can be built, renovated, upgraded, or expanded. The new strategy makes it easy for real estate investment to become a part of an individual’s retirement planning or investment strategy.
Investors are generally entitled to a part of rental income or sales revenue generated. In fact, the equity model works much like the stock market would. Investors basically own shares of a building, their capital making the project possible in the first place, and thus are entitled to a certain share of the proceeds or profit.
Benefits to Investors
Investors love the crowdfunding model because it gives them access to real estate, even premium real estate, regardless of how much capital they can afford to put up.
Internet-based crowdfunding, the ability to select specific projects that fit their needs, and the access crowdfunding provides to a wide variety of projects.
Like mutual funds, crowdfunding real estate services charge nominal fees for processing, reporting, and other functions. In some cases, companies seeking crowdfunding pay fees while investors do not. In other cases, investors pay the fees just as they would to any other broker or financial advisor. Whichever approach a service takes, investors are freer to focus on the deals they are interested in rather worry about fees and legal manoeuvring.
Perhaps the biggest benefit of crowdfunding for real estate is that it makes it easier to invest across geographic boundaries. Investors are no longer limited by where they live, their personal network, or by the specific types of property they can afford. It is as easy to invest in commercial real estate in London as it is to buy residential units in New York City.
Choosing Crowdfunding Services
Investing through crowdfunding is no different than investing through more traditional mechanisms in many ways . Individuals still need to perform due diligence, invest within their means, and research the locales they will be buying in by contacting local real estate services. There are, however, added risks that come with the added benefits.
Investors need to take care that the crowdfunding service they select is financially solvent and will be around for a while. Investors also need to look for transparent services, which is to say services that acknowledge the specific risks for each property.
Transparency is, perhaps, the biggest benefit online crowdfunding offers over more traditional investment tools like real estate investment trusts (REITs). In a REIT, investors have little or no information regarding the properties themselves and are often prevented from investing in their own backyards. Crowdfunding brings all of the benefits of REITs and adds to them refined control over investment selection and location. Crowdfunding also makes it possible for investors to find smaller opportunities, even as small as single-family homes, that would not be amenable to the large size of REITs.
Real estate has always been a long-term investment. Though there are plenty of infomercials promising overnight success, smart investors know that they need to be in it for the long haul if they want to be successful in real estate. Crowdfunding is no different. Investors should not expect distributions for at least two years in most cases. They should also anticipate ups and downs in the market and keep a diverse portfolio of real estate investments.