Looking for a way to invest in real estate, but capital is the problem? Maybe you are not willing to take all the risks that come with real estate investments. Either way, not everyone has a great capital base for investing in real estate while bearing its risks. This problem was identified by investing companies a while ago, and they came up with a new way of investing – Crowdfunding.
It is one of the hottest ways to expand your financial portfolio with minimal investment from your side.
What exactly is this real estate crowdfunding? Why should you go for it, and is it even safe? We will discuss all that and more in this blog.
What is crowdfunding for real estate?
Crowdfunding is a technique for raising money for a business. Real estate crowdfunding is an investment strategy that includes pooling together money from various investors and using it for investment opportunities in real estate. This enables small investors to have a share in big investments that they could not have on their own.
The main difference between the traditional way of investing and crowdfunding is that the traditional way requires only one investor for a huge investment, while crowdfunding involves several investors for smaller investments.
Crowdfunding platforms make use of social media like Facebook, Twitter and such to call in investors.
How crowdfunding in real estate works?
Crowdfunding in real estate begins with a single investor finding a good investment deal. They decide to call in other investors on the deal to pool money together for the investment. The first investor here is either an individual investor, a real estate developer or an investment company. Whoever the first investor is, they are called the sponsor of the project.
Once the terms and conditions of the investment have been discussed with all the investors, the sponsor will make the deal. If the money is insufficient, the funds are held until more investors agree to fund the investment.
Types of real estate crowdfunding
Crowdfunding for real estate can be broadly divided into two types of investment opportunities that are:
This is the most common type of crowdfunding in real estate as it offers a higher return than the next type. But the greater the return, the greater the risk. This type of crowdfunding allows investors to have a stake in the investment property, making them the shareholders.
This way, you will receive your per cent of the income generated from the property, e.g. rental income, based on the equity you have in the investment.
Another option, termed Preferred equity, is also popular among investors. It allows them to get their share from the income generated by the investment property before the sponsor.
The next type of real estate crowdfunding is debt crowdfunding. Here, instead of investing in the equity of the property, you provide a loan to the crowdfunding sponsor. In return, you will receive interest and principal payments for a specified period.
Instead of having independent loans from each investor, the borrower will take one entire mortgage loan from the crowdfunding platform. The share of interest for each investor will be dispersed by the platform.
The interest may be paid monthly, quarterly or yearly based on your deal with the platform. And since you are giving the loan, you will be the first priority during the interest and capital payment, much like preferred equity crowdfunding.
Benefits of choosing crowdfunding over traditional investing
There are several benefits of choosing the crowdfunding investment method over the traditional one. Here are some of the most significant ones:
- Real estate crowdfunding improves your financial portfolio.
- It enlarges your funding options.
- It helps you build an investment network.
- The risk is reduced in crowdfunding due to the participation of various investors.
- You do not have to be a real estate expert to begin.
- The investment asset is chosen by the crowdfunding platform.
- It saves both time and money.
- It involves easy access to capital without getting tangled in loans and credits.
- It is a great way to gain valuable feedback.
- Most crowdfunding platforms are user-friendly.
That was all you needed to know about crowdfunding in real estate. It is a new and exciting way of investing for individuals who do not have a large capital base of their own. We explained what real estate crowdfunding is, how it works, what are its types and what are the benefits of choosing real estate crowdfunding over the traditional way of one-man investment.
If you are looking to invest in a property that comes with fewer risks and decent returns, crowdfunding is the option for you. It will help you save all the time you would have wasted in searching for the right investment property and save money by investing only a small sum of money.