Beginner’s guide to real estate crowdfunding

Beginner’s guide to real estate crowdfunding

Real estate crowdfunding is a relatively new method of investing in commercial real estate that has gained a lot of traction in recent years. Crowdfunded real estate might be a lucrative investment option, but it isn’t appropriate for everyone. So, how does real estate crowdfunding work? What are the advantages of real estate crowdfunding? What do you need to know about seeking mass-market real estate investment loans? Here’s a beginner’s guide to real estate crowdfunding that will help you figure out if it’s a suitable fit for your risk tolerance and investment objectives.

Beginner’s guide to real estate crowdfunding

What is real estate crowdfunding?

Crowdfunding is a term that describes a group of people pooling their funds to pursue a shared purpose. Crowdfunding can also be used for investment purposes, and real estate is one of the most recent applications to gain traction. Real estate crowdfunding involves a group of investors who each contribute money to a specific real estate deal.

How does crowdfunding in real estate work?

When a developer or seasoned real estate expert sees an investment opportunity, they may not necessarily have the means (or willingness) to fully fund it on their own. So, to generate enough money to carry out their plan, they’ll invite private investors to contribute a portion of the project’s capital. In any crowdfunded real estate investment opportunity, there are three important players.

Sponsor

First and foremost, the sponsor is the person or company who selects, plans, and oversees the investment. The deal’s sponsor will coordinate the asset’s purchase, arrange for any contractors or other necessary work, arrange finance, and oversee the property’s eventual sale.

Crowdfunding platform

Second, the crowdfunding site is where the project’s sponsor recruits investors to help fund the initiative. Consider the platform to be a go-between for investors and sponsors. The platform will ensure that a deal fulfils certain criteria, publicise deals to potential investors, check that investors meet investment requirements, and handle regulatory issues. In addition, the platform will collect funds from investors on behalf of the sponsor.

Investor

Finally, the investor contributes a portion of the deal’s required capital in exchange for a share of any profits generated by the deal. An investor may be eligible for income distributions and/or a proportional dividend from a future lucrative sale.

The pros and cons of real estate crowdfunding

Real estate crowdfunding, like any other financial opportunity, isn’t right for everyone. Before choosing whether or not real estate crowdfunding is good for you, consider the following potential benefits and drawbacks.

Benefits of crowdfunded real estate investment

  • For starters, you may be able to earn bigger returns than you would from any other major asset class. The majority of crowdfunded transactions that have concluded have delivered annualised returns above 14%.
  • Crowdfunded real estate investing might help you diversify your investment portfolio. This is especially true if you currently have the majority of your assets invested in other asset classes.
  • Crowdfunding allows you to get the benefits of single-property investments without having to deal with the hassles of being a landlord or dealing with maintenance tasks.
  • Moreover, crowdfunded real estate allows you to invest in assets that may otherwise be inaccessible to you.

Drawbacks of crowdfunded real estate investment

  • Real estate investments made through crowdfunding are notoriously illiquid. You’re very much committed for the duration once you put your money down.
  • To be clear, this is a high-risk, high-reward investment opportunity. Most crowdfunding agreements come with a high level of execution risk, as well as the inherent risk of investing in a single real estate asset.

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