The benefits of crowdfunding for real estate can be significant. Crowdfunding for real estate marketplaces allows you to invest without having to also put in the work to fix up, market, and sell the investment. In other words, the investor can invest passively and wait for the investment to make money. You can invest in everything from strip malls to self-storage facilities to office buildings and not have to manage the actual property. Though you should understand both, these can be a great alternative to REIT investing. In this post, we go over both primary and secondary crowdfunding for real estate lending benefits.
Crowdfunding for Real Estate Pros
There are five primary benefits of crowdfunding for real estate:
- You can research the investment company and the people behind it rather than having to vet each investment.
- You can spread your investment over multiple companies or properties, lowering your risk and increasing the excitement of the investments.
- The process moves much more quickly because these professionals have connections and know what they are doing. The closing could be long and challenging if you try to invest in real estate.
- Unlike what happens if you invest in commercial real estate on your own, you do not have to do any management. Yes, you can hire a management company, but even in that case, you manage that company.
- There is less chance for volatility. A commercial property with tenants or a storage facility that gains customers will unlikely lose all these customers overnight. In many cases, the financial situation is quite steady and predictable.
There may be other primary benefits of crowdfunding for real estate for you as well, such as tax benefits compared to different types of investment, and it always makes sense for you to talk to a financial advisor when it comes to assessing the unique benefits of any investment for you.
Crowdfunding for Real Estate Cons
A major disadvantage of crowdfunding for real estate is the possibility of losing money. Investing in real estate, whether through traditional means or crowdfunding for real estate, is not without risks. The entire real estate market could decline, or your specific investment(s) could have trouble. There is sometimes no way to mitigate risk as much as you’d like – even what seems like a safe and sound investment could struggle. There are other drawbacks as well.
The Investment is not liquid
You cannot easily pull your money from crowdfunding for real estate investment. You may be able to sell your share and get lucky that the property you’ve invested gets sold when you want it to, but sometimes you want the money out and don’t have an easy way to get it.
Crowdfunding for Real Estate Fees
There are service fees and sometimes certain management fees when you make a peer-to-peer real estate investment through a platform. Making a direct real estate investment cuts out the middle man and therefore cuts out those fees. Of course, most assets have costs, and it may be a situation where you merely have to compare and contrast.
More Research
You may need to research crowdfunding for real estate more than you do in other types of investment. For example, regular peer-to-peer loans are easy to explore – you look into what the return rate has historically been on a particular class of loans and assume you can get the same return. With crowdfunding for real estate, there are many other factors and trends.
Crowdfunding for Real Estate Process
It is essential to understand the process of crowdfunding for real estate. While it is simple, knowing exactly how it works can help you be successful. Here are the basic steps in the process
Crowdfunding for Real Estate Initial Steps
- A commercial real estate development professional either builds a peer-to-peer lending platform or chooses one of the many established peer-to-peer lending platforms that work with real estate investments. S/he then applies to use that platform for the investments s/he will pursue.
- The developer then looks for properties that appear capable of producing income. In some cases crowdfunding for real estate will be needed merely to buy the property, but in others, money is required to rehab or re-purpose the real estate. Sometimes these two initial steps are reversed, given that the developer may want to identify properties first so that the chosen platform can be the best fit.
- Next, the crowdfunding for real estate campaign is designed and posted. The developer provides as much information as possible to give potential investors a clear picture of the property and its potential. The campaign also describes the background of the developers – they need to sell the potential investors on the project and themselves.
Crowdfunding for Real Estate Campaign
- In some cases, the developer will buy the property before the campaign starts – such as when the investment will be used for re-purposing or fixing it up. In other cases purchasing the property is dependent on the success of the peer-to-peer lending campaign.
- During the first few months, the investor gets information on how close the project is to being fully funded and any new information about the project. Once the project is either fully funded or at least funded enough for work to start, the investor gets information about the stages of construction as they occur.
- Finally, once the construction is completed, the investor has one of two payoffs: In some cases, the purpose of the investment was to improve or re-purpose a property to sell it, and in these cases, the investor will get a percentage of the sales price; In other cases, the purpose was not only to improve or re-purpose but also to profit from ongoing rental income, and in this case, the investor will get a percentage of that steady revenue.
Real estate peer-to-peer lending is not for everyone. Still, if you are reading this and the advantages seem to outweigh the disadvantages, you may want to look further and go to a reputable website that provides a platform for crowdfunding for real estate.
The Entrepreneur Side
Crowdfunding for real estate is an excellent way for an entrepreneur to dive into real estate investing, whether traditional commercial real estate, multi-family living, or land. You may want the investment to pay for the down payment, to bridge things while you do some development or attract tenants, or to pay the entire investment price. Of course, the amount of risk involved in the loan, and perhaps the amount of risk related to certain aspects of your creditworthiness, will determine the interest rate you’ll need to pay and the limits on terms. You’ll need to make a pitch that suggests that the investment is good and that it and the rest of your financial background make you a reasonable risk for the investors.
Process for Investors
There will likely be a two-step process for the entrepreneur looking into crowdfunding for real estate, the first being some prequalification that suggests that you have a strong enough financial background to attract loans and pay them back, and then an application where you will list the information that will go out to prospective lenders about you and your project. Then once the funding is committed, the platform acts as a go-between, handling all aspects of the closing and funding process.
Our work with Crowdfunding Real Estate
Crowdfunding for real estate provides excellent opportunities on both sides of the equation. Still, given the more significant amounts of money involved than many other loans, due diligence is required on both sides. Proceed carefully, and the result could be a nice profit. We can help! We provide free guidance and can make connections with the perfect portal for your needs, whether you are an investor or entrepreneur. Contact us to learn more.
