Tom from FIREd Up Millennial has a great post for you today that will give you an intro to real estate crowd funding. Check it out! It's a great read on an interesting new way to invest in real estate!
In 2018, there are more ways than ever to invest and diversify your portfolio. With the rise of online platforms and apps, Americans are no longer limited to the stock market when it comes to making their cash work for them. There are numerous forms of alternative investing available for the savvy investor — yet not all of them will yield a great return on investment.
Real estate crowdfunding is one example of an alternative investment that has the potential to help many investors diversity their holdings. When I was looking at different types of investments to make, I considered getting involved in real estate investing through a crowdfunding site. This is something I did a lot of research on, so I thought it would be helpful to include my thoughts with all of you.
Read on to learn what I discovered about this relatively new form of investing.
What Is Real Estate Crowdfunding?
Crowdfunding has become a popular way to raise cash for almost any endeavor, from studying abroad to starting a business. In real estate crowdfunding, investors have the ability to lend money to borrowers who are purchasing real estate. In most cases, this real estate will be renovated and sold at a profit. The investor will have the benefit of receiving regular payments on the loan, with interest, while the borrower gains the ability to purchase property that he or she may not be otherwise able to buy.
Through sites such as RealCrowd, Fundrise, Realty Mogul and others, borrowers can apply to have their project listed on the site. Investors can then choose to partially or fully fund a project at a specified interest rate after reviewing information about the borrower(s) and the project itself. Once the investment has been agreed to, the funds are released, and the borrower can begin making payments (principal and interest) on the loan.
Advantages of Investing in Real Estate through Crowdfunding Sites
Investing in real estate through a crowdfunding site allows investors to get involved in the real estate market without physically buying, selling, and renovating property. It can help many investors benefit from the booming economy in certain areas of the country — all without ever leaving your hometown.
It is the ultimate passive investment, where an investor can reap the rewards of a booming real estate market without being involved in the labor-intensive work of renovating a house or managing a property.
One great feature of investing in real estate in this manner is that you will receive periodic investment payments at a set interest rate. Unlike investing in the stock market, which can only offer projected returns, you know what you will be getting back when you invest through a real estate crowdfunding website.
In addition, because this type of investment tends to have priority over equity (stock) investors in a bankruptcy, if a deal falls apart, there is less risk for investors. However, with reduced risk comes lower gains — as discussed below, the anticipated return on investment is relatively low.
Disadvantages of Investing via Real Estate Crowdfunding Sites
Although investing in real estate through a crowdfunding site does have lower risks than purchasing stock, it follows that the likely return is lower than investing in the stock market. It is also important to know that investing in real estate in this way is not risk-free. If the real estate market collapses again, as it did in 2008, then many of these investments could lose their value entirely.
In order to best protect yourself from losing your investment, conducting extensive due diligence is necessary before investing in a real estate crowdfunding website. This can require quite a bit of effort on the part of the investor, as it may require digging into the borrower’s experience and financial history, as well as learning more about the current and long-term demand for real estate in the market where the property is located. The amount of work that may be required for each investment can be substantial, and may put off many novice investors.
Closing Thoughts on Real Estate Crowdfunding
As someone who is relatively inexperienced in the real estate market, I quickly realized that investing through a real estate crowdfunding website was not a great choice for me.
I didn’t have the knowledge to make informed choices about my investments. Given the relatively low potential return on investment, I did not want to devote the required time or energy to ensure that each of my investments would be sound.
Instead, I focused my investment strategy on the stock market. There is a wealth of information available about investing in stocks, requiring far less individual research time on things like whether a potential borrower had ever declared bankruptcy. I also knew that while the risk was greater with stocks, my potential returns would also be higher. For that reason, I decided that for now, my best investment strategy is to stick with traditional investing in the stock market.
By Tom – a millennial personal finance blogger specializing in debt payoff, financial independence, and early retirement. Check out his site FIREd Up Millennial!