The crowdfunding model is becoming an increasingly popular way for individuals to invest in large projects, especially in the real estate field, earning them returns that far outstrip those offered by more traditional investment classes. This is called real estate crowdfunding.
At its most basic definition, real estate crowdfunding allows multiple investors to pool their money together to invest in properties and projects bigger than they could afford or manage on their own.
Investors generally visit an online marketplace and browse opportunities that vary by investment type, geography, and target returns. Once they have selected an investment that aligns with their goals, their funds are pooled with other investors, and the investment is closed.
There are three options of what to invest in when it comes to real estate crowdfunding.
- Crowdfunding a buy to let property: You can directly invest in a project with a group of other people and earn a passive income once the project is completed, as would be the case when you invest in a rental property. Investors should bear in mind that there will be costs involved in maintaining and managing the property, while rental returns can also fluctuate as the market changes.
- Crowdfunding a sale property: The best way to make a once-off profit is to invest in a property that will be put up for sale once completed or fully invested. Property developments generally bring better returns as the profit margins are higher. Buying an existing property may also include some upgrading and renovations, otherwise, the margins may be too small to be worthwhile.
- Crowdfunding a loan: Lastly, you can invest in funding a loan for someone else’s project. This option generally offers better returns and a shorter wait to reap rewards as well as a lower risk profile, as long as the loan is secured with a property mortgage. However, unless you reinvest and build a portfolio, the gains are once-off. This is often also referred to as Peer To Peer property lending.
The benefits of the real estate crowdfunding model for investors
The crowdfunding model as an investment offers a few distinct and powerful benefits over traditional real estate investment.
Lower barrier to entry: As a normal, salaried person, it is usually impossible to invest in a skyscraper, an apartment complex, or a shopping mall. With crowdfunding, these opportunities are within the reach of everyone. Starting investment amounts can be very low, meaning you don’t need to be wealthy or ready to start investing.
Easy diversification: The first rule of successful investing is to diversify your portfolio, As property is generally very expensive, traditionally diversification was difficult if not impossible. The real estate crowdfunding model allows you to invest in many projects, in a variety of locations and across a series of types. This diversification is a great way to raise the security of your portfolio.
Hand-picking investments: When you hand over your money to a bank or investment fund, you essentially surrender control of where that money will be invested. The transparency and control offered by crowdfunding platforms allow you to choose the exact projects that appeal to you. This is especially important if you believe in ethical investment.
Higher returns: Borrowers are generally willing to pay higher interest rates for crowdfunded loans due to a variety of reasons. They may not be in a position to borrow money from a traditional institution like a bank, they may be in a great hurry and not have the time or patience to go through the lengthy process of application required from a bank. This, of course, benefits the investor.
Benefits of the real estate crowdfunding model for the borrower
In the case of crowdfunding a property loan, it is not only the investor who benefits, but many borrowers also prefer this model as well.
The myth that only developers with poor credit records or risky projects turn to crowdfunding is easy to debunk.
In fact, in a terrible irony, banks often penalize developers for their success.
As a developer, you are usually able to get traditional financing for your first few projects, but after a certain point, a “normal” bank won’t give you any more money because they view you as too leveraged despite the fact that all your properties and developments may be extremely viable with great profit projections. So, without a traditional bank’s money, you’d need to find a partner to put up the money or find a hard money lender who will provide funds. This usually comes at a brutal, predatory interest rate.
Many projects also need funds for only a certain part of their gestation, something generally referred to as a bridge loan. This may come as an unforeseen element and has the ability to scupper your entire project.
Real estate crowdfunding offers an amazing solution to this issue. Loans can be secured quickly and with much less hassle than through a traditional financial institution.
Crowdfunding is a great way to get into real estate investment at low risk and with even a small amount of capital.
As long as you make sure to choose a respected platform with a good track record offering some form of security or insurance, you will probably reap better rewards than through any traditional investment route.
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