Real estate crowdfunding is taking the real estate investment market by storm — disrupting the age-old traditional system that is highly exclusive and only accessible to those with a large amount of capital.
Also known as real estate syndication, the industry has put up some pretty impressive statistics (as of 2020):
- 60,000 investors have participated in offerings
- Investors received an average 8% preferred return
- Estimated market value set at $8.3 billion
(Check out this article for the most in-depth statistics.)
It’s clear that real estate crowdfunding has staked its claim in the industry, with the global market size set to reach $868,982M by 2027 with a CAGR (growth rate) of 58.3%.
That’s pretty astounding stuff.
While real estate crowdfunding opens the door for investors to participate in the market, there are some risks to be aware of. In this article, we’re walking you through:
- What is real estate crowdfunding?
- What are the benefits of real estate crowdfunding?
- What are the risks of real estate crowdfunding?
Let’s dive right in.
How Real Estate Crowdfunding Works
Real estate crowdfunding empowers individuals to pool financial and intellectual resources for investment in properties that are too big for one person or group to afford or manage on their own.
Thanks to a provision in the 2012 JOBS Act, an industry once confined to ultra-high net worth people is available to the crowd — making for a more equitable market for both sponsors and investors.
Here’s how it works:
- A “sponsor” selects a location to develop or purchase property.
- Funds to bring the project to life are sourced from the crowd.
- The crowd sees returns if the property becomes profitable, with the sponsor taking the highest percentage.
Pretty cool, right?
Let’s talk about some reasons why you might want to get involved.
4 Benefits of Real Estate Crowdfunding
Low Minimum Investments
Historically, the wealthy elite has been the only sector of the population equipped to make large purchases and develop properties.
Real estate crowdfunding, however, allows investors to participate in deals for as little as $1,000 (depending upon the platform).
While the deals themselves are a bit unpredictable compared to other forms of investment (we’ll get into this later in the article in the “Risks” section), you can permit yourself to start slow with smaller investments to mitigate potential losses.
Portfolio Diversification
As a prospective investor, you’ve been hearing it your whole life: diversification is key.
Especially if you don’t already have a stake in the real estate market, real estate crowdfunding is an incredible opportunity to get your foot in the door.
Generally, private real estate returns don’t move in tandem with the equity market — giving you a cushion should the stock market see a downtick.
Totally Hands-Off
Even if you could afford it, one of the biggest challenges with any real estate investment is property management.
In the real estate crowdfunding model, you never even have to set foot on the property. The sponsor takes care of everything — you just provide the capital to make it happen.
Asset Transparency
With real estate crowdfunding, you have the power to select the markets and properties that you’re comfortable investing in.
Unlike other investment opportunities such as REITS where you’re given access to a general strategic plan, real estate crowdfunding allows you to recognize exactly what you’re investing in, who is managing the property, and how they plan to go about making it profitable.
4 Risks of Real Estate Crowdfunding
It’s Out of Your Hands
Didn’t we just mention that the hands-off model of real estate crowdfunding is a benefit?
Yes, we did. But there is also some inherent risk that comes along with this.
You don’t want to end up investing in a situation like RealtyShares that closed down suddenly in 2018 — leaving investors to question the viability of the real estate crowdfunding model.
Luckily, there are many platforms out there with proven successes — it’s just a matter of doing your research.
To get started on this, consider checking out this article:
The Top Real Estate Crowdfunding Sites for 2021
No Guarantee of Return
As with any investment strategy — whether it be stocks, bonds, or real estate — there is absolutely no guarantee of returns.
Reputable real estate crowdfunding sites will provide you with a projected return, but that doesn’t mean that it’s a sure-fire bet. Market fluctuations, construction setbacks, and poor management could all lead to lower-than-expected yields.
There are also some worst-case scenarios, where bankruptcy or foreclosure puts the burden of return interest or principal on the crowd rather than the sponsor.
Many real estate crowdfunding platforms protect you from this, but it isn’t always the case. We recommend only investing in properties and projects that include this protection.
Low Liquidity
If you’re hoping to be able to invest or withdraw money at a moment’s notice, you might be better suited to exploring REITs or real estate ETFs.
Real estate crowdfunding itself has extremely low liquidity. It can certainly be classified as a buy-and-hold strategy — with most projects taking at least two years to see returns.
If you want to see real money in return for your investment, you could have to keep that money locked up for up to a decade. Keep this in mind before you invest!
Conclusions – Should You Participate in Real Estate Crowdfunding?
Real estate crowdfunding is a great opportunity to:
- Get your foot in the market with low minimum investment
- Diversify your portfolio
- See total transparency around your assets
- Put the burden of real estate in a sponsors hands
As with any investment strategy, there are risks that go along with it, including lack of control, no guarantee on return, low liquidity, and potential for complete failure.
So — should you participate in real estate crowdfunding?
If you’re willing to put in the time to perform diligent research, the answer is most likely yes. There have been tons of success stories from people just like you seeing great returns, and it’s a great way to stake your claim in a fast-growing market.
Want to learn more about real estate crowdfunding? We have some great resources for you:
- Video: Real Estate Crowdfunding Investing Explained
- Book: Real Estate Crowdfunding Explained
- Article: Real Estate Crowdfunding Statistics in 2020
Good luck with your real estate crowdfunding journey! Use Crowdcrux as your trusted resource for all things crowdfunding.
