These days, increasing numbers of entrepreneurs are searching for original methods to access capital to fund their ventures. For this reason, crowdfunding has grown in popularity immeasurably. It is simple to engage with other investors online, and Internet literate business owners are now starting to enjoy the benefits of this.
Flipping Real Estate With Crowdfunding
The common practice of rehabbing properties, or buying real estate at a lower price then promptly selling it on for a mark up, is nicely suited to crowdfunding platforms. This method is often employed by novice investors to obtain the necessary funds for larger projects, or to develop their reputation. With the right planning, a property flip can reap huge rewards. People who provide the capital for this, via crowdfunding or through other methods, will often receive a rapid return on their investment.
In addition, crowdfunding now allows smaller investors to take on multiple investment properties simultaneously. Some properties take a while to sell, so it is fairly common for individual investors to put several properties on the market at once. Lots of banks would shy away from financing real estate for numerous properties, however crowdfunding takes these institutions out of the equation completely.
Other Kinds of Investments
The two main kinds of investments available are debt investments and equity investments. Debt investments involve investing in mortgage loans linked to specific properties. Investors get a percentage of the interest when the loan is paid back. With equity investments, investors purchase residential or commercial properties. In return for this, they get a stake of equity in the properties. All investors receive a percentage of the properties’ rental income.
Out of the two, there is a greater potential for larger returns with equity investments, because loan interest rates determine debt investment profitability. Then again, there is more risk associated with equity investments, and they usually demand a lengthy period of holding.
Removing Accredited Investors From the Process
Most real estate financiers are accredited investors. This is the case with crowdfunding and with traditional real estate investing methods. It has been estimated that accredited investors own over two thirds of America’s wealth, even though they make up under nine percent of the country’s households.
However, crowdfunding has had a massive impact on the real estate sector already. This practice gives small investors the opportunity to get involved, without needing to find millions of dollars worth of funds. Also, it means that certain existing real estate markets are open to a far bigger quantity of investors. Rather than shouldering the whole financial burden themselves, investors can team up with a whole host of financiers to lower upfront expenses and realize their ambitions.
Advantages for Investors
In comparison to buying rental properties or investing in REITs (real estate investment trusts), real estate crowdfunding provides numerous benefits. In the past, private real estate investments involved fronting up large chunks of capital to take part. Real estate crowdfunding has lowered this bar considerably. For instance, RealtyShares has deals with a minimum investment of $5000. Often, there is little information available about REIT investments, which makes it harder to determine the merit of any given deal. RealtyShares comprehensively researches every deal ahead of time, so investors are armed with plenty of relevant details to make an informed decision. Investors can take advantage of various tax breaks with real estate crowdfunding as well. This includes depreciation, which usually applies to investment property ownership. Better still, between equity and debt investments in both real estate funds and residential and commercial properties, investors have the chance to profit from a new class of assets.
Real Estate Auctions Are Becoming More Popular
There are several factors that explain the recent rising interest in real estate auctions. Namely, the broad appeal of crowdfunding and increase in the use of high speed Internet by the general population. Auctions offer an ideal setting for properties or houses that need selling fast, so they cater to the ambitions of many real estate flippers and crowdfunding exponents.
Using crowdfunding, the main investors can pay the crowd back, with interest included, over a specified time period. The majority of contributors will receive a return of eight to ten percent, however this varies based on the precise deal conditions. Main investors do have to pay bigger rates of interest than those charged by banks, however they are not constrained by the strict rules of many financial organisations.
Real estate auctions are not the sole preserve of completed properties either. Lots of people now use online property auctions to find and submit bids for new build homes. This could offer you the benefit of being able to alter the design or layout to satisfy your requirements. Notwithstanding, the prices might be higher due to limited market exposure.
Practical Advice for Real Estate Crowdfunding
All property crowdfunding platforms have unique characteristics, and some are bound to be more suitable than others. Conducting research into the different platforms to discover their pros and cons is a vital step for every investor. Real estate investing is a sensible way of diversifying your portfolio, however it is wise to spread your risk out too. Evaluating the possible profits against the worst case risk scenario will help you to choose between pursuing equity investments or debt investments.
Each specific property investment has its’ own distinct return profile and liquidity schedule. Before proceeding with an investment, it is crucial to be aware of how long you will be locked into an agreement. Property crowdfunding platforms do not offer investment advice and — although numerous platforms research deals prior to showing them to users — not every platform does. Discussing the specifics of deals with a fiduciary or independent financial adviser will allow you to anticipate any possible problems.
Undoubtedly, with regards to the broader real estate sector, property crowdfunding has become extremely influential. It has eliminated many of the most difficult obstacles facing investors, and incorporated technological solutions to facilitate the process. This has allowed it to create new opportunities for both borrowers and investors.