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5 October 2016
Property crowdfunding allows independent investors to get access to hundreds of real estate deals and makes it easier to purchase ownership in commercial or residential properties that generate regular cash flow without taking part in the property management. So if you want to diversify your investment portfolio or just earn more interest on your savings, real estate crowdfunding might be just the sort of thing you need to consider.
Real estate crowdfunding basics
Property crowdfunding is often considered to be the most promising sector within the blooming P2P lending industry – according to the Cambridge Judge Business School, in 2015 real estate alternative financing models have generated over $1.26 billion in the U.S. The new business model directly connects investors with real estate developers and lowers the time and money requirements needed to invest.
A property crowdfunding platform enables developers to pool funds from many individuals to build or purchase an apartment complex, office building, hotel, shopping center, industrial warehouse or any other type of property that might otherwise be out of reach. The minimum investment amount is $1,000 – $5,000, compared to $50,000 – $100,000 for traditional offline real estate investments. If the funds are not collected in full, the money will be returned to the investors.
Debt v. equity investment models
Essentially, there are two basic forms of real estate crowdfunding: debt and equity investments. As for the first financial strategy, you are lending money to the property owner who will pay off the mortgage loan through a fixed pre-determined payment plan and at a fixed annual percentage rate – typically, 8%-12%. This investment strategy is considered low-risk because the loan is secured by the property.
As for the equity investment model, you will get a share in the chosen property, proportionate to the amount of cash you have invested. You will receive a return on your money in the form of a part of the rental income that the property will generate. If the property is sold, you may get a share of its appreciation value.
Equity real estate investments are associated with greater profitability (you can earn a 15%-25% annual return), but at the same time they are more risky – if the property doesn’t succeed as expected, your equity shares would become worthless. Plus, if you invest in a new project, it may take from 3 to 10 years for the company to grow in value.
Real estate crowdfunding platforms to consider
Founded in 2012, Fundrise is a crowd investment marketplace enabling accredited/non-accredited investors to invest online in US-located commercial properties. The minimum investment amount is just $1000; the reported annual average return in 2015 is 13%. Each investment offering listed on the site is qualified by the US Securities and Exchange Commission and pre-screened by an independent third-party accounting company. Fundrise charges a 1% annual asset management fee.
Fundrise works on the basis of the eREIT platform (online real estate investment trust) that allows investors to get access to profitable real estate offerings. The company promotes two financial products: Income eREIT and Growth eREIT. The first one is based on debt investment deals, the second one focuses on equity offerings and is more suitable for investors seeking a higher return.
Launched in 2013, RealtyMogul is a real estate crowdsourcing company providing a wide range of real estate investment products. Accredited and non-accredited, US and international investors can browse real estate offerings and purchase ownership for just $5,000. The company is famous for raising $1.5 million for the Hard Rock Hotel in California in 2014. The annual management fee is 1%-2%.
RealtyMogul.com offers two types of investment opportunities: debt financing and equity investments. In August 2016, RealtyMogul also launched MogulREIT, an online real estate investment trust with a 3% annual service fee and a minimum investment of $2,500. When you find an investment deal you are interested in, you can sign necessary legal documents online and send funds via wire or ACH transfers.
RealtyShares is an online P2P investment platform providing equity and debt real estate opportunities. Accredited and institutional investors who meet certain eligibility criteria can invest as little as $5,000 (or $1,000 for some deals) in a variety of property types and track their dividends online via an investor dashboard.
RealtyShares offers to invest in a single specific property, for example an office building, with a 9%-11% annual return or in a group of properties. The company conducts a background investigation of every property they list and publish the results online to reduce possible risks. There are no website registration or subscription fees, but you will need to pay up to 2% for asset management.
When it comes to investments, real estate can become a lucrative alternative to stocks and bonds – you can earn higher annual returns at lower fees. Plus, you may invest in this asset class even with a relatively small amount of money in your pocket. On the other hand, no investment is risk free: real estate deals are not illiquid – there is no secondary market to sell them. To minimize the chance of making a foolish investment, make a proper research and choose different types of properties in multiple locations.
Exciting articles several times a month