Table of Contents
Real estate crowdfunding is a new rage in the marketplace. Especially with the advent of the internet and the subsequent ease of crowdfunding, real estate crowdfunding has opened many doors even for small investors. No longer do you have to go looking for venture capitalists or turn to traditional lenders like banks or peer-to-peer lending.
But when anything new is introduced, there are also a lot of questions, apprehensions and resistance. Many investors may feel hesitant to get involved with real estate crowdfunding, even though the benefits for small and individual investors is actually a lot more in this method.
The following article is a simple introduction to the world of real estate crowdfunding investments and what it means to invest your money in this way. More importantly, is it a good way to invest your money? What are the returns like? This article will attempt to explore these questions and more:
Real estate crowdfunding is a relatively new way of investing your money. It began properly in the United States only in 2012, when the JOBS (Jumpstart Our Business Startups) Act was passed, which was directed at encouraging small businesses by removing some of the earlier security regulations in the economy. Since the JOBS Act was passed, crowdfunding as a means for private investment and private companies to fund their projects was made possible.
While it began with the more affluent investors getting direct access to the marketplace via crowdfunding or peer-to-peer lending, more and more platforms are making the process more democratic and including investors across all income levels.
Typically, crowdfunding can be carried out easily via the internet. There are several real estate crowdfunding sites on the internet, which not only provide a platform for investors but also borrowers and owners. The latter sections of this article will introduce you to some of the best sites.
To put it mildly, crowdfunding has completely changed the marketplace and who has access to it. Where at one time, real estate investors may have to build extremely high credit scores and approach a traditional bank or turn to a hard lender to source their investment projects, with crowdfunding becoming an option, every avenue can be a place to make a pitch for crowdfunding your project.
With crowdfunding, you can use the easy accessibility 0f your existing networks of friends, family, social media sites like Facebook, Twitter, etc. Established and commercial real estate groups are also coming aboard this new phenomenon of crowdfunding their real estate projects or funding smaller investors for long-term gains. What’s more, the access to the US real-estate market in this way is also relatively low-risk. Most real estate crowdfunding sites allow users to browse the market and make bids free of cost. In other words, real estate crowdfunding has changed investor access like never before!
On an average, debt investment for open investments is 8.5% and for completed deals, it is about 9.1%. When it comes to equity investments in real estate crowdfunding, they could average at 16.4% for open investments and 19.1% for completed deals. These are only average numbers and the average returns are bound to differ across property types. For example, single-family residential deals are typically short-term debt, so the returns are also expected to be lower. In other property types with equity investments, the returns can be much higher.
But beyond the returns, there is more to real estate crowdfunding. This method of investing is more about diversifying your portfolio and making use of the easy accessibility to the market that crowdfunding brings.
For example, it can be very difficult for individual investors to have a stake in enough properties to balance out the risks of any specific property type or region. If you are an individual investor, you may spend thousands of dollars on a single property. This leaves you with little to invest anywhere else. You are then stuck with that property and that region, making you vulnerable to risk.
With real estate crowdfunding, you can diversify your portfolio by investing small amounts in several different crowdfunding deals. Your investments can be spread across several different property types all over the country, reducing your risk by a great margin.
Having said that, there are a few drawbacks that real estate crowdfunding investment could have. The following are some of the cons of real estate crowdfunding investment:
- Crowdfunding does not provide investors with any different immunity. As with a real estate investor using any other method to invest, if the market has a crisis, the investor is likely to lose money.
- Investment default risk from real estate developers may actually be higher in crowdfunded projects, as compared to peer-to-peer and direct real estate investment funding.
- In the absence of a secondary market, there may be a lack of liquidity as there may be fewer selling opportunities for investors.
When you are looking to engage in real estate crowdfunding, you need to look for transparency. Do not be swayed by the great offers you are getting or all the passive income you are offered. The first thing you need to look for is transparency on the site you are finding funding on. Look for crowdfunding platforms that not only acknowledge the risks of the marketplace openly but also have an ‘education-based’ approach to risk management.
While the platform is expected to vet all the sponsors that come with offers, as an investor you should go ahead only if you feel confident about trusting the sponsor. If you do not understand where the money is being used or if some aspects of the investment are unclear to you, either enlist the help of an expert to make you understand or wait for a better opportunity where you can take more confident strides.
Any reliable real estate crowdfunding platform should not only coordinate the transaction for you but should also provide you with the opportunities to interact with the sponsor directly.
The following are some of the best crowdfunding sites in the marketplace that have a good reputation and offer the most commendable services:
PeerStreet is a real estate crowdfunding platform that gives you access to high-quality investments. On the platform, you can either create your own portfolio or allow the site to build a portfolio for you, using it Automated Investing option. On PeerStreet, you can create your own portfolio of real estate loan investments or allow the site to build a portfolio for you with its Automated Investing option. You need to fill out a short form and the algorithm will throw up investment options for you.
The platform has a strict vetting process for both lenders and borrowers. Only experienced private lenders with a sparkling track record are allowed on to the site. A dedicated team of finance and real estate experts are engaged in underwriting the loans based on the information they are provided by the users.
Most of the loans are short-term (6-24 months), so the platform is useful even for single-family investors. The LTVs are typically below 75%.
The platform also provides a range of different types of investments so you can diversify your portfolio.
The servicing fee on each loan is balanced out between the interest payable on the loan and on the interest rate the investor received, ensuring that the platform gets paid only when the investor gets their returns. The fee is never hidden and ranges between 0.25%-1.00%.
Crowd Street is another real estate crowdfunding platform where you can find the best matches for your investment projects. It is also a great platform to build your network as you can participate in the various webinars and events the platform organizes. The platform tries to put you in touch with the right people and make your investment portfolio more diverse.
The platform also has professionals and experts who are in charge of vetting all the deals that sponsors bring. There are thorough steps of review, which include screening the sponsor, screening the deal and finally reviewing the offering.
According to the official website, the team of experts review about 400 offerings in a month but only about 3% get approved. These numbers alone are indication enough that each sponsor goes through a thorough check and you are only paired with the most reliable match for your investment project. In fact, there is a 26-point review each offer goes through to make sure only the best deals make it to the site.
The site’s user interface is also extremely easy to operate. You can see all the active offerings listed on the site and make your own decisions accordingly.
Real Crowd is another real estate crowdfunding platform which focuses not only on finding you funds for your investment projects but also encourages you to invest intelligently. The platform allows you to interact and build connections with commercial real estate companies. You can invest alongside them in the bigger investment opportunities they may be engaged in.
This site is also extremely easy to navigate. All the open offers will appear on the homepage for you to consider. They are all filtered by region. Instead of simply acting as a middleman, the platform also tries to connect you directly with real estate professionals and helps you build lasting relations with them. This platform is ideal for commercial real estate investments and is not the best option for single-families or individuals looking to flip homes.
You can create an account on the website for free and browse through all the offers. You can also compare all the offers and pick one that is the best for you. When you have picked a property and are ready to close, the platform will handle all the electronic signing, document storage and communications with your investment partner.
First RealFund is another commendable platform where you can identify properties, sponsors, property managers, etc. Sponsors and borrowers both go through a thorough vetting process. Once the capital request is approved, a crowdfunding period of 15-30 days is opened up.
The site has an easy-to-use navigation page. You can see all the current listings and offerings clearly. You can be confident that the platform has identified the most reliable deals, the offering processes are transparent and that the platform will carry out efficient management of any deal. You require only an account with the platform to get started and then you can start exploring all the options and make an offer for free.
The platform also has a blog section that elaborates on aspects of crowdfunding, what the future of crowdfunding and how the platform has tried to demystify it. You can access this content easily even without creating an account.
Real estate crowdfunding is a relatively new practice. Naturally, people will still take time to warm up to it. Individual investors would perhaps still feel more confident about going the traditional route of a bank or hard lender, despite the benefits and promise real estate crowdfunding projects offer. For larger, more affluent investors, real estate crowdfunding has already been a great way to tap into the market. Several real estate industry stalwarts came on board with this trend almost as soon as it was made possible in 2012.
If you are venturing into real estate crowdfunding for the first time, keep a lookout for the reliable platforms that are known to do good work and provide support. As mentioned above, looking for transparency is key! There should be no hidden charges and the platform should acknowledge all the risks of the deal beforehand. In the end, it is up to you to close the deal so if you do not feel confident, there is no need to rush into anything. Only invest in a project you feel good and confident about.