Real estate crowdfunding is a relatively new method of raising capital for real estate investments. Crowdfunding is not the traditional way of raising capital but it’s generating a lot of buzz and traction and does provide investors with an additional route to raise capital. But what exactly is real estate crowdfunding and what are its advantages?
Real Estate Crowdfunding, Defined
Real estate crowdfunding utilizes crowdfunding specifically to raise capital for real estate investments. With crowdfunding, investors are able to invest in a variety of real estate projects without the need to work with mortgage brokers or real estate agents, and they don’t need to be responsible for the day-to-day management of the project.
For developers, real estate crowdfunding is a way to raise money for their real estate development by gaining access to interested investors.
In the past, real estate development was difficult for individuals to invest in unless they had significant capital or could pool their funds through private equity firms. With crowdfunding, that changes. Crowdfunding allows entrepreneurs and real estate professionals to expand the number of investors that can fund a project.
How it is Carried Out:
Because crowdfunding is typically based online, it also makes it easy to market real estate projects through social media websites like Facebook, Twitter, and LinkedIn to promote real estate projects and attract investors. With online crowdsourcing, investors can target beyond what would be considered a “traditional investor” to reach a much broader pool of potential investors
Crowdfunding vs. Other Real Estate Investing Methods
What are the advantages of crowdfunding vs. other more traditional investing methods?
As an investor, here are the pros to real estate crowdfunding
- Get access to the real estate market with smaller amounts of money than required in the past.
- Work directly with real estate developers and have a voice in the process.
- The ability to choose among multiple real estate projects to invest their money.
- Access to many different project types, providing them with many choices and the ability to split their investments between projects for diversification.
- Much like any other form of investing, investors can lose money if their real estate project underperforms.
- The risk of investment default (from real estate developers) is higher for crowdfunding compared to peer-to-peer and direct real estate investment funding.
- A lack of liquidity, as the absence of a secondary market, restricts easy access to selling opportunities for investors.
Types of Real Estate Crowdfunding Investments
There are 3 main types of real estate investments:
- Common Equity – When people think of real estate investing, this is the type of real estate investment they refer to. When you invest in a common equity deal, you hold an interest in the underlying property’s profits. Say you contribute 10% of a deal’s funding and it’s structured as common equity. You’d get 10% of the income distributed to investors and 10% of the profit upon the sale of the property (minus fees). The main thing to know is that common equity investments don’t have a set, guaranteed return. Their performance depends on how well the underlying property does.
- Debt investments – a debt financing deal for commercial real estate crowdfunding means you’re essentially acting as a project’s mortgage lender. You’re the one financing the property and receiving regular, predetermined interest payments. In terms of risk, this is the least risky way to invest in crowdfunded real estate deals. However, while the risk is low, so is your return potential.
- Preferred Equity investments – Think of preferred equity is essentially a combination of both debt and common equity. Like debt investments, preferred equity generally has fixed distribution to investors. This means investors’ income is independent of how the property is performing. Preferred equity holders generally get a better payout than debt holders, but they also take on more risk. This type of investment is not as risky as common equity.
How to Get Started Crowdfunding for Real Estate with EquityDoor
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