Real estate Crowdfunding is a new way to invest in commercial real estate, but is it the best option to explore your investment? It can be a lucrative type of real estate investment but not for everyone. Could it be a good idea to risk investment goals?
What is real estate Crowdfunding?
A whole lot of people can put their resources to fund real estate. However, Crowdfunding refers to a group of people that put their money together for a common purpose > real estate for instance. Some other Crowdfunding activities are majorly a charity organization forum.
You might have seen incidents of health challenges which demand expensive funding, most times, aids come from some Crowdfunding groups. Those are also part of Crowdfunding. Some other time, it will be investment situations in which real estate is one among them.
Real estate Crowdfunding always involves groups of investors that contribute money to fund a specific real estate deal. A situation like investors identifying a lucrative opportunity to renovate an apartment but no sufficient funding, this is where he employees the idea of Crowdfunding and then after, can sell at its profit. If you are an investor, you are not far from this.
How real estate crowding funding work
The general idea is not farfetched. The central idea behind real estate is Crowdfunding. Developers or experienced real estate professionals take advantage of real estate Crowdfunding by identifying with investment opportunities. This is because their resource alone may not be able to fund the investment alone. This is why the need for individual investors is contributing to some of the large capital projects in other to raise enough money to execute their plan.
In real estate Crowdfunding, there are always three key players in the investment opportunity;
The first is the sponsor. The sponsor is the individual or company that points out, plans, and oversees the investment totally. They are the ones that facilitate the purchase of the asset, arrange for contractors, arrange to finance, and are in charge of the sale of the property. Most times, deal sponsors contribute part of the project funding and are entitled to a certain share of any profit they earn for the deal’s investors.
The second is the Crowdfunding platform. This is where the sponsor finds investors to raise the necessary capital for a project. However, the platform now serves as the middleman between investors and sponsors. Its duty is to ensure that the “Deal” meets certain standards with the investors, advertise deals to potential investors, guarantee that investors meet the required need for investment, and as well handle regulatory issues. Also, the platform is the one to collect investor’s funds on behalf of the sponsor.
Finally, the investors now contribute to some of the deals required capital in exchange for a share of any profit the deal yields. An investor may get some sort of income contributions or as well be entitled to a proportional payout from an eventual profitable sale.
Advantages of real estate Crowdfunding investment
To some, they find this advantageous while it is not so for others. This is why this opportunity is meant for a certain set of people pursuing a common goal. However, there are several potentials and tangible gains of real estate and as well cons are involved in Crowdfunding that one should bear in mind before taking action. Here are the reasons why people go into Crowdfunding on real estate.
- There is a probability for higher returns which you may get from any other major asset class.
- Crowdfunding real estate investing can be another form of diversifying your income.
- Without becoming landlord, you can gradually benefit from the potential of the single-property investment.
- It allows you to invest in assets that may be inaccessible to you. but in the midst of that, you are still a share-holder to such investment.
Disadvantages of Crowdfunded real estate investment
Sometimes it’s very important to know the reason for investing with Crowdfunded real estate. This sometimes might be to your detriment and we have gathered much information to keep you updated. It is very obvious that there is no perfect investment. Below are some of the listed weaknesses.
- The total summary of this is a risk. There is no investment that is capable of double-digit rates of return without risk. Therefore, Crowdfunding is not an exception. Every execution is a deep risk and will yield certainly a high-reward if it works out and vice versa.
- You cannot turn back again once you have committed your money into the investment.
Find Crowdfunded real estate opportunities
Once you should at first be after is a Crowdfunding platform. just as I mentioned earlier, it is a middleman between the investors and the sponsors. However, it will be wise to deal with a reputable platform while in search of opportunities to invest.
At first, before you proceed, ensure that you have understudied the platform’s vetting process. This should be considered by both the developers that allow sponsoring deals on its platform. All of this platform makes use of a high level due to intelligence at both the sponsor and deal level. Furthermore, ensure you know where your money actually goes.
Often time, invest in the real estate asset or to a legal platform that owns a stake in the property. This is because you protect your assets if the platform were to fall. Assuming your money is an investment in the platform, not just the real estate assets, then count your investment to be at much higher risk if the platform has a financial storm.
Lastly, find a platform with the kinds of real estate investments you’re interested in, whether it’s individual properties, a handful of properties, or a highly-diversified fund that owns a stake in dozens of properties. If you plan to pick individual properties and choose how much to invest in each one, then a platform that only offers funds doesn’t make sense, and vice-versa.
Before you go into investing, there are certain things you ought to evaluate which are as stated below;
- How risky is the project?
- How much debt is the project taking on?
- What is the investment category?