You've been working away at your job for a while. You've been putting away funds every month, paying down your debts, and generally doing all the right things with your money. And then one day it hits you:
Your money should be working for you.
In 2019, CNBC reported that 70 percent of investors had regrets about how they'd handled their money. But if you're not a fan of the stock market's extreme ups and downs or you just want to have an additional income stream, crowdfunded real estate investment may be worth exploring.
What is real estate crowdfunding? Can a regular person really use these options to get a sense of how to start real estate investing?
We're about to tell you what you need to know about crowdfunding and real estate investment. All you have to do is keep reading.
You've heard of companies raising money through IPOs, right?
When these businesses get listed on the stock market, investors can purchase shares in the company and profit from its success. Real estate crowdfunding follows a similar process except that with that investment style, you have a developer or a management company who is using the funds to purchase real estate and turnaround a profit for investors.
If you've had your eye on real estate for a while but the idea of purchasing and renovating a building is just too intimidating, real estate crowdfunding makes it possible for you to enjoy the benefits of buying property without having to spend a lot of money upfront.
We've just explained what crowdfunded real estate is. But none of that fully explains how crowdfunded real estate investment can completely transform the return that you get for your money. By our count, there are at least five irresistible reasons to turn to crowdfunded real estate investing:
Traditionally, becoming a landlord required you to start with a substantial chunk of money. On top of the financial wherewithal needed to purchase the property in the first place, you also need money for maintenance, property taxes, and insurance, among other expenses.
When you opt for crowdfunding, it's possible to get a stake in a real estate investment project without having to purchase another house. Entire press releases have been written about how spending time in the market is often more important than timing the market. And thanks to the lower amounts of startup capital required to invest through crowdfunding, you can put this saying to use by investing sooner.
You've heard the saying, "Don't put all your eggs in one basket" before, right?
Although it's not usually phrased that way in financial circles, this bit of conventional wisdom often guides people's investment strategies. After all, what happens if you invest all of your savings into a single building and the deal ends up going sideways? Suddenly everything is gone and you've lost a lot of money.
With crowdfunding, that $10,000 that may have gone towards a down payment on a single condo can be spread between two or three different projects. Suddenly, you can invest in a couple of different real estate sectors. Or perhaps you'd like to get involved in luxury housing and commercial real estate at the same time. Crowdfunding makes it possible for you to have a stake in multiple real estate projects at once.
It's like owning shares in a mutual fund without having to go through a stock exchange.
Imagine having a diversified real estate portfolio like the one we just talked about. Except instead of crowdfunding, you opted to finance those projects yourself. You've got one office building that you spent $5 million to buy. You bought an apartment building that's costing you just shy of $2 million. And then you decided to purchase a couple of single-family residential homes at a price of about $500,000 each.
If your city was hit with an economic downturn or you had the misfortune of renting to tenants who were out of work during the pandemic, you could easily find yourself struggling to get a return on that $8 million investment. When you opt to be a part of multiple projects, however, suddenly you're not out by several million dollars if things go belly up. Maybe instead you've lost a few thousand.
For investors who are particularly risk-averse, this matters a lot.
Although in theory being a landlord should be a comfortable, easy, rent-collecting life, dealing with tenants is actually a lot of work.
You have to run credit checks. You're still responsible for the upkeep and maintenance of the property. Depending on your state, there are legal rights that tenants and squatters may be able to enjoy. And if you ever have to evict someone, there are additional legal procedures that you have to follow.
When you are invested in a piece of real estate as part of a crowdfunding project, you don't have to deal with the day-to-day hassle of being a landlord with tenants and leases to follow up on. All you have to do is put in your money and enjoy watching your portfolio grow.
At first glance, crowdfunded real estate can look an awful lot like a REIT or a real estate-focused mutual fund. And while there is some validity to the comparison simply because you're pooling your money with a bunch of other real estate investors, there's a key difference with real estate companies that can't be overlooked:
You have way more control over what you invest in.
When you buy shares, you're counting on fund managers and companies to find the best properties and management companies available. Sometimes this can result in big wins over time. And other times, if the fund manager is wrong, you could end up seeing the market value of your shares decline.
In a crowdfunded deal, you're in the driver's seat. You can look over the details of each property, assess the market and the odds of turning a profit, and only put your money into projects that you feel are likely to succeed. That's a level of control over your investment that you may not get through other methods.
Before you run to the nearest crowdfunded real estate platform you can find with your credit card and your debit card in hand, there are a few steps you can take to give your portfolio a better chance of success. To that end, we've put together a list of our top tips for getting the most out of your real estate investment:
The 2021 real estate market has been hot. Red hot. So much so that experts have been throwing around words like "housing shortage" and "interest rate-driven demand." Nobody would blame you for taking a look at this lending environment and feeling like it'd be impossible to lose money.
However, what a lot of people don't realize is that investing is an area where it doesn't pay to be fashionably late. You have to always be looking at what's next on the horizon. Will permanent work-from-home positions make office real estate less of a guaranteed investment? Is the demand for residential real estate going to stay the same if and when interest rates go back up?
A lot of this will depend on the timeframes involved with your investment. But the reasoning still stands. If there's reason to believe that the trend you're dipping your toe into won't last, you can save yourself a lot of grief by passing on the deal.
When you are the one who's outright buying the property, you can afford to be somewhat lackadaisical about your exit strategy. If you go for a crowdfunded real estate investment, however, you're relying on someone else to cash in and turn a profit on your behalf. So as you're researching the property and taking a look at what the developer or contractor has to say about the project, it's important to make sure that there's a clear path from "investment" to "your wallet".
Is the company in question looking to refinance down the line? Are they going to flip the property within the year after making renovations to it? Or is the plan to sit back and rake in rent while giving investors a percentage of the profits month after month?
Because every property is different and investors may not all have the same appetite for risk, there are no right or wrong answers with this. The important thing is that you understand how you're going to be repaid.
From 1926 to 2018, the S&P 500 has had an annual return of 10 percent to 11 percent.
For all the discussions about the unreliability of the stock market, there's no denying that long-time market investors are bringing home the bacon. You might not necessarily be able to get that type of a return from your real estate investment. However, the major benefit of putting your money towards property is that you don't have to worry about the market value of your apartment buildings falling to zero.
Or put another way, investing in real estate can give you steady gains. And it can give you relatively low-risk profits. But in exchange for that stability, you may not be able to get the high-flying returns of some of the strongest years of the real estate market. That doesn't mean that one strategy or the other is bad. But you don't want to be looking at your real estate portfolio in a few years and saying things like, "Huh. I thought that was going to generate a bigger return than that.".
You wouldn't decide where to put your life savings by blindfolding yourself and throwing darts at balloons, right? Although real estate has a reputation for being a relatively safe way to invest, you don't want to leave things to chance.
The nice thing about crowdfunded real estate investment is that you can invest pretty much anywhere. From office space in New York to single-family homes in Texas, there's no geographical limit to where you can invest. However, just because you can invest in those specific properties, doesn't mean that you should. You'll still want to do your due diligence by building up an understanding of the market you're investing in.
What are the neighborhoods like in this place? Is the city showing signs of improvement? Are families excited to live in the area?
Of course, the level of research you need to do here might vary. It's highly unlikely that a house in Beverly Hills would see its value drop down to nothing. But even if it seems like a hassle to do this type of research, you'll be glad you did your due diligence in the long run.
On paper, there's a lot to like about being a real estate investor. For one, you're invested in real property. And for another, you're able to build up a second stream of income without having to kill yourself to make it happen.
With crowdfunded real estate you get the benefits of investing in real estate and you're able to do it with relatively small amounts of cash. If you love the idea of owning property and collecting rent but you don't have the means or the ambition to be a landlord, you may want to consider giving crowdfunding a try.
If you want to find out more about investing, property, and owning a home, read more of the posts on our site!