In most cases, investing in real estate requires plenty of cash. And the concentration of cash into a single project puts you in a big risk, especially if you investment also is leveraged with debt. Nevertheless, there are alternative ways of investments that can be good to consider.
What is Real Estate Crowdfunding?
However, with real estate crowdfunding, you have an opportunity to pool your money with other investors to get a piece of projects that you wouldn’t be able to fund on your own, which can be a great way to diversify your investment portfolio. Here, you can chose to invest in a real estate portfolio or in a single project, and then you receive earnings in proportion to your stake. You might receive monthly or quarterly payments, and, in some cases, you get a payout when the property is sold.
There are two main types of real estate crowdfunding:
In Equity crowdfunding, you get a share of the asset in question. Not only do you receive payments from rents, but you also get a share of the profits if a property gets sold.
The key point with debt crowdfunding is that you receive income based on mortgage payments. So, if the property is sold, you don’t have a share of the profits because you’re investing in the debt, and not the actual property.
Nevertheless, real estate crowdfunding is also involved with some risks you should be aware of before you move forward:
- Loss of capital. As with any investment, you run the risk of losing your capital.
- Due diligence. Some platforms conduct a due diligence of the projects they offer, while others don’t. If you’re not careful, it’s easy to lose money.
- Liquidity problems. With equity real estate crowdfunding, your money might be tied up in certain projects for a set period of time, so you can’t just exit the investment on short notice.
- Lack of transparency. In some cases, you might not be clear about how a deal is structured. Moreover, based on how new real estate crowdfunding platform (or the project company) is, it’s also difficult to see historical returns and get a feel for the potential results.
Real estate crowdfunding can be an interesting alternative for someone who wants to include real estate into the investment portfolio but doesn’t have a lot of cash available to make a big purchase. Take into consideration what is likely to meet your goals – but don’t assume that property prices will grow forever and that all projects will be a great cash cow. And keep in mind that many experts recommend that you limit your real estate exposure to between 10 and 20% of your portfolio, depending on your investment horizon.
Disclaimer: This document contains general information, which is not advice, and should not be treated as such.