Investing in real estate is a great way to diversify your investment portfolio while securing your future source of income. However, not every real estate investor has the finances to invest in real estate. Real estate crowdfunding has opened up a new path for investors allowing them to invest with ease.
What is real estate crowdfunding?
Real estate crowdfunding is an easy way for borrowers and investors to pool funds together for different real estate investment projects. Both parties benefit from real estate crowdfunding. Borrowers can quickly raise funds for projects and investors can add real estate to their portfolios.
Related: All You Need to Know About Real Estate Crowdfunding as a New Investor
There are two primary ways to invest in real estate crowdfunding. You can either make equity investments in commercial or residential properties or invest in debt investments. In equity investments, the investor receives an equity stake in the property in exchange for funding the project. The returns are in the form of a share of the rental income that the property generates. Real estate investors usually receive payouts on a quarterly basis.
On the contrary, when you invest in debt, you’re investing in the mortgage loan that is associated with a particular property. The loans are repaid with interest, a percentage of which is then paid to each real estate investor participating in the deal. Investors can receive payments on a monthly or quarterly basis.
Of the two types of investments, equity investments offer a higher return on investment since the profitability of debt investments is limited by the interest rate of the loan. However, equity investments carry more risks, require a longer holding period, and are last to be paid back
The advantages of real estate crowdfunding
Real estate crowdfunding offers various advantages for property investors. Compared to other types of real estate investments like Real Estate Investment Trusts (REIT), real estate crowdfunding has the upper hand when it comes to the following:
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Transparency
Real estate crowdfunding has the upper hand in terms of transparency and control over asset selection and location. Other types of real estate investments like REITs give real estate investors limited information about the underlying access. There are numerous real estate crowdfunding websites that give investors the opportunity to review all the details concerning the deal before making a final investment decision.
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Availability of low levels of investment
With real estate crowdfunding, real estate investors can find multiple offerings with a wide range of amounts needed to participate. Some real estate crowdfunding companies feature deals with a $5,000 minimum buy-in.
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Diversification
Every real estate investor understands the importance of diversifying their investments. Having proper diversification is proven to increase your overall long-term return on investment. Real estate crowdfunding allows investors to diversify their portfolios with an array of investments both in commercial and residential properties. Investors have the opportunity to gain exposure to a new asset class with very few barriers to entry.
Read Also: Diversification and Real Estate Investing: 3 Ways to Diversify Your Portfolio
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Tax benefits
Buying an investment property comes with many benefits on the side such as your ability to deduct depreciation and other associated expenses for the property’s maintenance. Unlike REITs, real estate crowdfunding allows equity investors to obtain the rewards of depreciation deduction and tax benefits without having to actually own the property.
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No work involved on your behalf
The real estate crowdfunding company does most of the work. So if you are looking for a hands-on type of investment, then crowdfunding is not for you. The company will also sell real estate on your behalf so you can make money in real estate passively without having to work for it.
Read Also: Do Passive Income Investments Really Exist in Real Estate?
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Ability to work with proven experts
One of the most appealing aspects of real estate crowdfunding is that investors have the ability to invest in multiple projects over time with proven crowdfunding experts. Real estate crowdfunding gives investors the flexibility to pick and choose the deals that they find most attractive. Additionally, investors can invest in one deal or they can add more than one project to their portfolio.
Who can participate in real estate crowdfunding?
Until only recently, only accredited investors were allowed to invest in real estate crowdfunding. An accredited investor is someone who has a minimum net worth of $1 million or an annual income of at least $200,000! This is even more for married investors who are required to have an annual income of $300,000.
However, the regulations concerning real estate crowdfunding have changed over the years and are allowing smaller investors to enter. Non-accredited investors who earn $100,000 annual income are able to put in 10% of their income into real estate crowdfunding investments each year. Real estate investors who earn less than $100,000 are able to put in 5% annually.
Real estate crowdfunding websites
Here is a list of some of the best real estate crowdfunding websites for both accredited and non-accredited investors.
1. Fundrise
Fundrise is usually the top of the list for real estate crowdfunding websites. It’s a great website for raising capital and it allows you to invest as little as $500 into an investment deal that you see best fits. With Fundrise, you can enjoy a high return on investment with an annual average dividend of 8%.
2. GroundFloor
GroundFloor is another real estate crowdfunding website for both accredited and non-accredited investors. This website offers you full details for your choice of investment. You are free to choose the loan plan and specific projects that suit you best. The annual average return on investment is 10%.
Related: The Best Real Estate Crowdfunding Sites
3. Holdfolio
Holdfolio is one of best real estate crowdfunding websites because they diversify your investment into many investment properties. Their average return on investment is 10% which is considered a very high ROI.
4. Realty Mogul
This real estate crowdfunding website gives investors the opportunity to choose a specific investment property or invest in multiple properties. They have an array of properties from multifamily investment property to commercial real estate investment properties. Realty Mogul accepts a minimum cash investment of $1,000 and fees range from 0.3-0.5%. This real estate crowdfunding website also provides debt and equity financing for borrowers.
The bottom line
Real estate crowdfunding has established itself as a major game changer over the past couple of years. It comes with many advantages for both borrowers and investors. As long as you do your due diligence correctly, you can turn any real estate crowdfunding deal into a successful real estate investment.
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