Real estate Crowdfunding is a way for cash-strapped real estate investors to get the financing they need to flip a house, buy a rental property, or anything that concerns real estate.
What Is Crowdfunding In Simple Words?
In simple words, Crowdfunding is the system and practice of funding a project or an enterprise by collecting small amounts of money from a large number of people, recently, usually through the Internet. It is another form of crowdsourcing and alternative finance.
What is Real Estate Crowdfunding?
Crowdfunding for real estate can be defined the process of convincing a pool of investors to raise funds in the form of capital to complete a real estate project. Crowdfunding for real estate is the same as the general crowdfunding definition explained above but the specific end goal of real estate investment in mind.
On the other hand, crowdfunding for real estate can offer non-professional investors the chance to invest their money in the real estate market with less risk compared to financing a project alone.
Lets take for instance, someone who wants to buy a $300,000 duplex as a rental property can save $50,000 for that purchase. But what if he/she can’t secure a mortgage or get a loan approval for the remaining $250,000 they owe? They can contact investors or potential investors in their network by phone calls, text messages or even emails.
They can also use real estate crowdfunding investment platforms, although some of these platforms have difficult requirements for the occasional investors to meet in terms of project size and accreditation.
It is more relevant to the average consumer by offering the opportunity to invest in the real estate sector via crowdfunding platforms, such as Crowdtsreet and Fundrise, just as they would put money into a mutual fund or a stock exchange. Some of these real estate crowdfunding platforms have stringent criteria that investors must meet before they can be involved, however, others like RichUncle and Fundrise, allow investors with as little as $500 to invest.
These platforms are usually REITs, real estate investment trusts, which are regulated by already laid down rules just the same way the SEC regulates the stock market in the United States. But it is still possible to crowfund real estate investment without these platforms (and even without forming your own REITs).
How Does Real Estate Crowdfunding Work?
Crowdfunding has become very popular in a generation that expects great convenience from applications and technology. Crowdfunding sites and apps, like GoFundMe and Kickstarter can help anyone fund anything from a vacation in the most beautiful cities to a business plan.
In essence, crowdfunding works by someone with a big goal of raising capital to complete a project through oral message and sharing on social media platforms. Ultimately, they hope to get enough investors to finance their project. It is an alternative to securing a loan from a bank, a traditional lender or a big private investor.
How To Get Crowdfunding For Real Estate
If you need crowdfunding for real estate and you are confused on how to go about it, you can follow the steps below to get started:
- Structure your crowdfunding process
- Find or create a real estate crowdfunding platform
- Invest/raise capital
- Purchase real estate
- Earn a place (hopefully)
- Structure your Crowdfunding Process
Before you call an online real estate crowdfunding platform, you’ll need to make sure you have all the paperwork in order with the help of a lawyer who is experienced in crowdfund to guide you on the processes so you don’t lose your funds.
- There are some things you need to consider first before contacting crowdfunding platforms, they are:
- Will investors get back a percentage of their investment?
- What is the reimbursement period? Instead, will they get a share of the investment?
All of these area of concerns need to be weighed and contractually locked in writing to avoid problems that may arise later in future.
Keep in mind that if you get more than 100 investors, you will follow rules and regulations by the federal government regulatory body. But even if your project is as simple as bringing five people together to buy a quadplex, you’ll want to make sure that your project is protected with more than just a handshake.
This is true especially if each investor is given a stake, which means that instead of (or plus) a return of interest in their involvement, they get a share of ownership in the project. It is important to clarify who is a full partner in the business (with a say and control over the business) and who will be a limited partner (i.e. who pays financial contributions but does not have a say in the running of the project).
- Find Or Create A Real Estate Crowdfunding Platform
Setting up a crowdfunding platform can be as easy as going through your existing network and calling a few people or sending out emails. If you’re a little more knowledgeable about tech, you can create a website and email potential investors, directing them to a page on the website where they can make payments. Some platforms may also offer email integrations that can make it easier and faster to tell more people about your project. You can also check out traditional consumer crowdfunding platforms like Fundrise and RealtyMogul.
Be mindful that most platforms necessitate investor accreditation. These are investors with a net worth of $1 million or a yearly income of at least $200,000, however, that equity is excluded from the value of their home.
You should also consider the fees charged, the time it takes to get the funds, and whether or not you can access your funds before certain fundraising goals are met. If you are not raising enough capital via crowdfund, you may need to use other financing tools to fill the financial gaps, for example, a traditional loan or cash.
- Invest/Raise Capital
Once your documents are in order and you’ve set a plan of action, it is time to get down to business. Whether you are making phone calls or sending out emails, you will have to be persistent because not everyone will have interest in your project. This is where having a portfolio that shows your experience or the return on investment this project can offer investors helps. Having a flair for selling or marketing is an advantage.
If you use one of the many real estate crowdfunding sites, be aware that they will take commissions from your funds and may not release it until you reach your target goal. It may also take a while for the payment to be released to the specified bank account, which is normal given that the amount of crowdfunding can be a large amount of money and large transactions usually go through a rigorous security process. Make sure you know how long it takes to withdraw your money so you can plan your transaction accordingly.
- Purchase Real Estate
Once you have hit your crowdfunding goals, then it is time to make your purchase. Whether you are a full-time real estate developer or a part-time investor, it is required to know that this part of the process involves a lot of paperwork and legal structure.
The incredible news is that since you’ve crowdfunded your real estate investment, you can avoid the many problems and hurdles of getting a loan from a bank and other lenders, such as the long wait for loan approval. loan, which has set up many crisis floors in today’s greedy loan climate. With crowdfunded capital, you are ready to take action.
- Earn a Profit (Hopefully)
Real estate investors have to fall in love with what they do, but the return on investment is the ultimate result. To ensure that your crowdfund process generates a profit, you will need to add the numbers up from the start, including factors such as the percentage each investor will get in return for their investment, the costs associated with the project, and any taxes on the capital gains that can consume your profit.
This information will help you determine how many investors you can bring on board before the dividends or interest paid to each investor erase the profitability of a potential real estate project.
Pros And Cons Of Real Estate Crowdfunding
There are several pros and cons of real estate crowdfunding which will be explained in details below
What are the Pros of Real Estate Crowdfunding?
One of the benefits of real estate crowdfunding is that it can offer investors a fast and easy way to seize an opportunity that might otherwise be lost because of financial deficits.
Real estate crowdfunding investments can also be an attractive alternative to real estate business financed by a traditional loan or mortgage. By structuring the participation in the real estate project by way of equity crowdfunding, the main partner (the partner who owns the agreement) can offer each individual investor an equity investment in the property instead of paying him interest. Thus, an investment in crowdfunding offers greater flexibility.
When it comes to using a real estate crowdfunding site for the average uncredited investor, this can be a great way to get extra cash flow without the risk of stock market volatility. Over time, real estate is a more stable investment, so participating in a crowdfunding investment can be a great way to stabilize an investment portfolio and reap rewards from the crowdfunding investment.
Even a qualified investor can benefit from real estate crowdfunding, which can generate significant cash flow and dividends without having to manage a portfolio.
What Are the Cons of Real Estate Crowdfunding?
From the perspective of involving in a crowdfunding by contributing funds, the downsides include commissions you have to pay for using a particular platform, taxes payable to the government, and the illiquidity of real estate since it is an asset. Some platforms charge a whopping 2.5% or more for managing your funds. You will also be subject to unwanted tax rates depending on your profit, but a knowledgeable tax advisor can help you avoid damage in this area.
Liquid assets are those assets which can easily be converted into cash, however, real estate is an illiquid asset, meaning that if you want to withdraw your money from your investment for whatever reason best known to you, it is not as easy as withdrawing from a brokerage account invested in stocks.
When it comes to crowdfunding in real estate, the immediate downside is the work to be done. It is much easier to get a loan from one person than it is to rally multiple investors. You may also find that the increase in the number of participants devours your profit. You should also remember to structure your operations legally so that investors cannot exercise undue influence in the decision-making process. The best way to do this is to make them limited partners, this also requires a lot of legal paperwork.
Real estate crowdfunding can raise capital quicker than a mortgage from a traditional lender, but it can also take longer than getting a quick or swing loan from an investor.
Real Estate Crowdfunding is a Great Option for a large range of Investors
Crowdfunding in real estate is a means for investors to get involved in the real estate market if they don’t have enough capital of their own to start. It makes possible for small investors to invest a few hundred dollars in a REIT that manages a large portfolio of properties, while also allowing real estate investors to raise funds for the capital they need to buy a home or a rental property.
If you are interested in contributing to real estate crowdfunding investment or want to raise capital for your next real estate project through crowdfund, it is necessary to find out about the terms and conditions of the platform in advance. If properly structured, crowdfunding for real estate can be a worthwhile investment for everyone involved.