The real estate business is still the preferred investment venture for many investors in the United States. Increased demand for housing and shop space prompted by various factors has seen the real estate business boom amid constant fears of collapse over the last decade. Because of its lucrative nature, investors often seek the help of financial institutions and other entities to finance their real estate projects. However, credit facilities are not easily available and accessible to everyone. This is why some investors are moving towards financing real estate through crowdfunding.
What is Crowdfunding
Over the years, the term crowdfunding has evolved to mean different things to different people. When broken down to the basics, crowdfunding is simply the process of raising money from the public. Nonprofit making organizations have several terms for crowdfunding including;
- Social media fundraising
- Online fundraising
- Peer to peer fundraising
When it comes to financing real estate, crowdfunding is the pooling together of resources by several investors to undertake a specific real estate project. The 2 main crowdfunding options in financing real estate are equity investments and debt investments.
In this option, investors come together and finance a real estate project in exchange for an equity stake in the project. They all share the income the real estate project generates.
Debt investments, on the other hand, provide investors with an option of financing real estate projects by investing in a mortgage associated with the real estate project of their choice. Once the mortgage is repaid, investors get their money back by sharing the interest.
Equity Investments vs. Debt Investments
Of the two crowdfunding options, equity investments have proven to be riskier and require investors to be more patient. However, they offer higher returns compared to debt investments. This is because the returns gained from debt investments depend on the interest rate attached to the mortgage loan.
Financing Real Estate Through Crowdfunding
Advantages of Financing Real Estate Through Crowdfunding
There are several benefits associated with financing real estate through crowdfunding. They include:
Unlike a Real Estate Investment Trust (REIT), where information regarding a real estate project is limited making it hard to assess the risk involved with the project, crowdfunding options offer investors with adequate information to enable them to make the right investment decision.
Financing real estate through crowdfunding allows investors to spread their money across several real estate properties. This enables them to gain access to new asset classes, which would be out of their reach if they were going solo.
Previously, many people seeking to invest their money in the real estate market would be locked out due to the huge amount of capital required to start. This has changed since the introduction of crowdfunding in the real estate industry. Now you can start your investment journey with as little as $5000.
Owning an investment property comes with certain tax benefits and breaks such as depreciation. Deductions for depreciation allows investors to recover some of the expenses they incurred while investing in a real estate property.
Tips for Financing Real Estate Through Crowdfunding
Choose the Platform Wisely
There are several crowdfunding platforms that you can choose from, and each differs from the others. Before settling on one, ensure that you have carried out thorough research to identify the strengths and weaknesses of each platform. Choose the one that suits your interests best.
Check on Liquidity
Liquidity options and return profiles differ from one investment project to another. Before committing your hard-earned cash towards a real estate project, try to understand how long your money will be tied down to the project. Checking on liquidity ensures that you make a sound investment decision.
Review Investments Yourself
Crowdfunding platforms in the real estate industry do not always advise investors on the best investment options. Therefore, while many of them take time to vet investment opportunities, you should not rely heavily on their expertise. Go through the nitty-gritty details of the deal with a financial advisor or a real estate expert. This will help you uncover any issues that might affect your investment negatively.
While investing in real estate offers you handsome returns and helps you to diversify your investment portfolio, you should not overlook the associated risks. Assess whether the projected returns outweigh the associated risks. This will also help you choose between equity investments and debt investments.
Process of Financing Real Estate Through Crowdfunding
1. Pick a Crowdfunding Platform
There are several crowdfunding platforms you can choose from. We will look at some of the most popular ones before the end of this article. Do your research and choose the best fitting.
2. Submit an Application
Once you have chosen the best crowdfunding platform for you, submit a filled online application form. This enables the platform to review the application and kick start the funding process.
3. Get Approval
After approval, you will be required to provide additional information about the real estate project. For debt investments, the principals of the sponsoring company undergo a background and credit check. You will also be asked to provide the renovation plans and the budget. Equity investments require you to submit a draft offering memorandum if one exists.
4. Attract Investors
Your real estate project is then presented to accredited investors on the platform for their review. Those interested in the opportunity you have provided
start the process of raising capital.
5. Raise Capital
Due to the unique nature of each real estate investment opportunity, the duration it takes to raise capital varies from one project to another. Debt investments can attract funding within 24 hours, while equity investments can take up to several weeks, depending on the holding period.
Once investors have submitted their commitments, funds clear within 5 days.
Top Crowdfunding Platforms for Financing Real Estate
- Realty Mogul
- Patch of Land
Financing real estate through crowdfunding has enabled low-income earners to venture into the real estate business without costing an arm and a leg. If you have been holding back from venturing into the real estate business because of the associated high capital, go online, and explore the various crowdfunding platforms to help you kick start your dream project.