Making investments in real estate is like having a permanent life insurance policy that you do not pay premiums for.
This is because apart from diversifying your portfolio and creating a long-term income source, property investments are powerful and stable which means that they are immune to inflation while being able to grow in value steadily.
They also allow you to leverage in order to purchase more massive investments, and most importantly, have substantial tax benefits. All the above factors are a prerequisite for an excellent investment.
Investing in real estate, however, is no cake walk.
More often than not, most investors find themselves having money but not finding deals or having a good deal but having no cash.
Over the past three years, however, a new concept known as real estate crowdfunding has revolutionized how property investments are done, and with great success.
Crowdfunding is a means of generating capital through the collective effort of a large pool of people via a crowdfunding platform.
In the past, raising capital meant approaching a small group of wealthy investors such as banks with your business plan so you could get funds.
This approach meant that you had to really impress these investors for you to get the funding.
In crowdfunding, however, all you need to do is pitch your idea on the platform which has thousands of people willing to invest in viable business ideas.
The take is that you can reach a lot of people while using minimal resources and having a higher chance of getting investors.
Real estate crowdfunding, similarly, works under the same principle in that it involves multiple investors pooling their funds in a real estate project.
However, this type of crowdfunding is different in the way investments are made, the level of risk involved, and the potential returns that the investor stands to enjoy.
Private real estate firms are connected to investors via an online platform. This platform enables a potential investor to view the pre-screened commercial, residential, and mixed-use properties while being able to see what is going on in every step of the investment process.
In previous years, only accredited investors could take part in this venture. This meant that you had to have an annual salary of at least $200000, and $300000 for married investors, or have a minimum net worth of $1000000.
The reason for setting this standard was that the above group of individuals was assumed to have the requisite resources, knowledge, and experience to manage their money.
However, changes done on the JOBS Act saw the relaxation of the rules which had banned solicitation of investors. This is what gave birth to crowdfunding real estate. Now, non-accredited investors can take part in these projects.
Within these non-accredited investors, those who make $100000 annually are able to put 10% of their salary into crowdfunded investments while those who earn less than $100000 can only place 5% of their annual income.
To invest in crowdfunding property deals, you can do so by either making equity investments or debt investments.
Here, the investor provides funds for the project and in turn, is given an equity stake in the property. The returns come in the form of a slice of the rental income produced by the property. Typically, investors receive dividends on a quarterly basis.
This is the alternative to equity investments. It involves investing in the mortgage loan of a specific property. The income generated is based on the interest on your principal. These payouts usually are done on a monthly or quarterly basis.
Benefits of real estate crowdfunding to investors
Before the changes in legislation regarding property investment, getting approval for a legitimate property deal with a buy-in of less than $20000 was unheard of. Real estate crowdfunding has ushered in a new era of a diverse group of investors.
This means that today’s investors can get can get access to the property market with little amounts of cash.
Nowadays, the real estate market is more democratized. This means that no institution can filter investment opportunities for you; you choose and vet options by yourself.
Additionally, you can work with real estate developers directly and have an opinion on the process.
Benefits of crowdfunding real estate to borrowers
1. Capital is raised in a shorter time
Traditionally, one would have to wait for months for the bank to approve your loan. To acquire real estate crowdfunding, however, only takes weeks.
2. Lower costs
As opposed to banks, crowdfunding platforms don’t have the high overhead costs associated with the former.
Real estate crowdfunding platforms allow you a diverse list of properties, investors, and financing options to choose from.
Concerning profits earned, equity investments are more likely to give you higher returns. This is because the profitability of a crowdfunding debt investment is determined and limited by interest rates on the loan.
Consequently, there is a higher degree of risk associated with equity investments plus they have a more extended holding period. This means that equity investors are typically paid last.
Debt investments, on the other hand, have steady returns which allow you to predict your payout and when you are to receive it.
Additionally, debt investments have shorter holding times and less risk.
While looking for the right real estate crowdfunding platform for non accredited investors, it can be easy to get lost in the myriad of options available to you. Here is a detailed guide on selecting the best platform.
1. Check whether the site is just a listing service platform.
There are websites which serve no other purpose apart from listing services. Ideally, you want a platform that acts as dealer-broker. Also, only choose a platform that has prior experience handling your kind of investment.
2. Check how long the site has been available.
Real estate ventures are typically long-term investments. This is why you need a platform that has been there for a longer period with a robust venture capital backing.
3. Check how the site conducts due diligence.
This implies the kind of documentation that they collect for potential deals. Does the site ask companies to provide indemnities or liabilities in the event that something goes wrong?
4. Customer service quality
Does the platform have someone readily available to answer your queries?
Getting the financing for a real-estate project from crowd investing, or being able to invest in one has become more democratized and easier than ever. Real estate equity crowdfunding could be your ticket to investment success.
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