Since the advent of platforms like Kickstarter and GoFundMe, crowdfunding has become the approach du jour for a variety of needs. Today, real estate crowdfunding is increasingly popular, both from an ownership and investment standpoint.
However, many people aren’t clear about what crowdfunding real estate involves, how the arrangements work, what it takes to get started, and the types of returns they can potentially capture. If you’re wondering, “What is real estate crowdfunding?” here’s a look at real estate crowdfunding for beginners.
What Is Real Estate Crowdfunding?
Many people are curious about non-traditional ways to start investing in real estate. As a result, when they learn that crowdfunding is a potential option, they often ask, “What is property crowdfunding, and can it help me build a strong portfolio?”
Crowdfunding – for any purpose – is a funding source that allows individuals or companies to secure cash for a particular goal. Usually, small investments are solicited from the general public, making the project financially accessible to the masses. Typically, in exchange for an investment, the business or individual running the campaign offers investors something in return, such as access to a product, service, or ongoing revenue stream.
Generally speaking, real estate crowdfunding lets companies gather money from investors to make investments or pursue ventures relating to real estate. For example, it may allow businesses to purchase properties that’ll become rentals, with investors receiving a piece of any profits generated. In other cases, companies may use crowd-generated funds for development projects, where the investors will secure returns once the resulting property is sold or rented out.
Essentially, crowdfunding real estate spreads out the financial burden, which can reduce individual risk. It may also shorten fundraising timelines if the project is properly presented. Plus, it can come with fewer limitations or restrictions for the campaign operator compared to funding alternatives, which they may view favorably.
Real Estate Crowdfunding Pros and Cons
As with all types of investing, crowdfunding real estate comes with its fair share of pros and cons. Before getting involved, it’s wise to take a close look at the advantages and disadvantages of crowdfunding property investments, allowing you to determine if they’re right for you.
Pros of Real Estate Crowdfunding Investments
Real estate crowdfunding investments are often a simple way to add property to a portfolio. In many cases, the barrier to entry is incredibly low, allowing investors with modest financial capabilities to get involved in real estate investments that would be out of their reach if they had to pursue them alone.
Additionally, crowdfunding real estate reduces personal risk. Any risks associated with the property are shared among every investor, leading to less overall exposure. Plus, this approach is typically far less burdensome to manage when compared to owning your own investment property, as you aren’t personally responsible for ensuring maintenance and upkeep occur.
In most cases, potential returns are also incredibly clear. Most companies outline their intentions for the property, including how it will generate revenue for investors. For example, a business may discuss the price they intend to charge a tenant for a rental, allowing investors to easily see how much a share in a property is potentially worth.
Plus, successful real estate crowdfunding ventures usually offer higher returns than traditional real estate investment alternatives, such as real estate investment trusts (REITs). Finally, the need for ongoing investment is typically minimal, if it’s required at all.
Cons of Real Estate Crowdfunding Investments
When it comes to the drawbacks of real estate crowdfunding investments, a lack of liquidity is a notable one. Often, selling your shares or divesting isn’t something that can happen quickly, which may not be ideal in some cases.
Another issue is that real estate crowdfunding is a relatively new concept. As a result, many platforms or companies operating in this manner don’t have long track records, so it’s hard to gauge their potential for ongoing success.
Shifts in the real estate market also impact the investment. If a property is purchased when the market is flourishing, a downturn later can devalue the investment and harm returns. Since real estate pricing changes may occur slowly, a full recovery may take years, depending on the investment.
Additionally, there are always risks associated with investments involving real property. Fires, floods, vandalism, and similar issues can impact the property, leading to higher company costs and harming investors’ returns.
It’s also important to note that many crowdfunding platforms charge fees that investors may have to pay. As a result, the initial cost of getting involved may be higher than expected.
Finally, while many real estate crowdfunding ventures are legitimate, scams are also out there. Often, there is little – if any – recourse for investors scammed out of their money, creating a level of risk that may not be present with more traditional investments.
Real Estate Crowdfunding vs. REIT
When you’re looking at ways to add real estate to your portfolio without having to purchase your own rental properties to manage, you generally have two viable options: a crowdfunding real estate investment or a REIT. Each has its benefits and drawbacks, so understanding how the two stand apart is often essential to ensure you make the right choice for your portfolio.
Crowdfunding real estate investing can create opportunities for investors to get involved with a specific property, essentially purchasing a share in a commercial or residential property or development project. While there may be a platform involved to manage the collection of investments, the approach is far more direct, as funds go to the campaigning company or individual and are used for a specific, outlined purpose.
With a REIT, the process is similar in that the organization behind the REIT purchases properties and provides returns to investors based on rent collected in the form of dividends. In most cases, directly getting involved in a REIT isn’t an option unless you’re an institutional investor. However, you can find mutual funds and ETFs that allow you to purchase shares in a REIT through a brokerage, creating a relatively low barrier for entry.
Often, the benefit of going with a REIT is that most companies behind them invest in a large number of properties. As a result, along with diversifying your portfolio by adding real estate, there’s diversification within the investment in the form of multiple properties. Additionally, scams aren’t typically an issue with REIT mutual funds or ETFs. However, the returns on REIT ETFs or mutual funds are usually lower than you get with crowdfunding, so keep that in mind.
Is Real Estate Crowdfunding a Good Investment?
Overall, real estate crowdfunding is riskier than some alternatives, but that doesn’t mean it isn’t worth considering. However, before you start getting excited about any potential real estate crowdfunding returns, due diligence is essential.
Ideally, you want to spend time researching both the real estate crowdfunding platforms that are available, as well as the individual opportunities. There is a wide array of platforms, each with its own minimums, fee structures, and approaches. Plus, if you’re opting to invest in individual properties, every rental market has its nuances, and it’s wise to get to know them before taking the leap.
Finally, real estate crowdfunded investments shouldn’t make up your entire portfolio. Adding in other assets helps you diversify, which can help mitigate some of the risks associated with bolder investment choices.
Crowdfunding Real Estate in New York: How to Start Investing
Getting started with real estate crowdfunding in New York is reasonably simple. As mentioned above, you can explore REIT ETFs or mutual funds through any brokerage, which may be an easy way to start.
However, if you want the ability to invest directly in New York properties, you can explore platforms like Roofstock, RealtyMogul, Arrived, or similar options for listings in New York. While opportunities in the state aren’t always available, they do come around, so you may need to keep an eye open to ensure you can get involved in the right property once one is available.