Investing in real estate provides a strategic way for investors to diversify their portfolios, while still creating another income stream. Real estate crowdfunding entails multiple investors pooling funds in a real estate project. There are two basic types of investments to choose from:
Equity Investments – Investors invest in residential or commercial properties, and in exchange, they hold a stake of equity in the property. The rental income is shared between all the investors using stake ratios.
Debt Investments – This translates into making investments in a mortgage loan linked with an individual property. On full loan repayment, each investor receives a share of the interest.
Between these two, equity investments have the biggest potential for higher returns. The reason being that the profitability of debt investments has a limit from the interest rate of the loan. Then again, equity investments require a longer holding period and are riskier.
Benefits for Investors
In comparison to purchasing a rental property or making investments in real estate investment trust (REIT), real estate crowdfunding provides certain advantages such as:
• Diversification – Between equity and debt investment in both residential and commercial properties and real estate funds, investors have an ideal opportunity to gain strategic exposure to new asset classes.
• Accessibility – Conventionally, investments in private real estate translated to bringing tens and hundreds of thousands of dollars to participate. The bar is much lower with real estate crowdfunding. Offers of as little as $5,000 are available.
• Tax Benefits – Crowdfunding in real estate provides investors with a chance to take advantage of certain tax breaks, which usually apply to owning a property investment, such as depreciation.
• Increased Transparency – For REITs, information regarding the underlying investment may be insufficient. Limited information can make the process of gauging the soundness of the deal difficult. In crowdfunding, the firm operating the crowdfunding platform vets all the investment deals beforehand to provide sufficient information to investors to make informed decisions.
Real Estate Crowdfunding Best Practices
To ensure success in crowdfunding, below are some of the practical tips to help.
• Choosing a platform – Every platform for real estate crowdfunding is different, with some being a better fit than others are. An investor should carefully research the strengths and weaknesses of various platforms and settle with the best.
• Investment review – It is highly advisable for investors to review the deals critically themselves. Crowdfunding platforms are not realty advisors.
• Don’t overlook risks – Investors should weigh the expected returns against the risk to determine whether debt or equity investments are the best for them.
Real estate crowdfunding has become a major game changer as far as the larger real estate sector is concerned. Crowdfunding is opening new avenues for borrowers and investors alike. This is with the introduction of tech-based solutions and dealing with the most provoking challenges to investing in real estate.