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Crowdfunding isn’t just for start-up companies anymore. It can also be a great platform for investors. Although crowdfunding real estate is a relatively new phenomenon, it can be a worthwhile option if you understand how it works.
Real estate crowdfunding works like other crowdfunding ventures: investors pool funds to kick off the project that they believe will generate profit. Simply put, crowdfunding is a way for business owners to raise money.
A major difference between crowdfunding and traditional fundraising methods has to do with the platform. Unlike more traditional methods, crowdfunding is usually conducted online. Most real estate crowdfunding platforms funnel real estate investments directly into real estate investment trusts.
There is a high professional threshold in real estate crowdfunding. But, over time, some platforms have minimized their thresholds so people can invest with as little as $500.
Investors have adopted crowdfunding as an alternative to more traditional means of real estate investing. Larger investors use the platform to attract investment funds from groups of accredited investors, while smaller business owners often launch campaigns to raise money for their business ventures.
Property crowdfunding is not only an excellent fundraising alternative, but it also has other notable benefits for both borrowers and investors:
As with most business opportunities, there are some disadvantages of crowdfunding that you should consider. These include:
Equity investments provide higher returns than debt investing. In this type of crowdfunding, you earn profit returns based on the property’s rental income. Investors receive profits quarterly, and they earn a share of the property’s appreciation value once the property is sold. One major concern that investors should know is they can lose money if the property’s value decreases.
Lending-based investments attract more investors because it is a simpler way to invest. This type of investing allows investors to lend funds to the property owner for a fixed interest rate. The interest rate depends on the amount invested and on the amount of the loan.
DiversyFund: This site gives users the option of investing in private market assets with an initial amount of as little as $500. It is one of the most accessible real estate crowdfunding sites as it opens the investment door to all users, not just wealthy people.
Fundraise: This site also allows real estate investing with just $500 to start.
Streetwise: The minimum amount to begin investing using this platform is $1,000. This crowdfunding site vets all properties and tenants to protect investments.
Crowdstreet: This platform is your best option if you want to manage your investments by yourself. You can search for properties and select where you want to invest.
Every crowdfunding platform has its own rules, so some may allow you to refund or retrieve funds while others may not.
If the crowdfunding goal is fulfilled without the use of funds, the page owner can refund donors’ money at their discretion.
Yes, you can crowdfund to earn the down payment of your home.
The average fee platforms charge is around 5% of the total money raised from the campaign. There is also usually a 3% fee on every transaction. You may also need to pay an extra fee if you don’t meet the funding target.
The maximum amount of money you can raise through crowdfunding is $5 million.
Real estate crowdfunding, like any other investment, carries the risk of loss. This is why it’s critical to research the crowdfunding sponsor and the agreement.
Another risk involved in real estate crowdfunding is illiquidity. You cannot simply exit or sell your stake in a crowdfunding venture as you can in public markets. When you commit to a crowdfunded real estate venture, you’re committed for the full period.
Crowdfunding real estate is a great idea for investors who want to build passive sources of income since they don’t have to worry about managing those properties. Also, it is ideal for investors who don’t have enough capital to buy property but are still interested in investing in real estate. Plus, this option allows investors who would rather not be landlords the opportunity to invest in real estate.