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Crowdfunding is a type of funding in which individuals raise money to accomplish their ideas and projects. The crowdfunding sector has been fiercely expanding and the statistics are unequivocal. Well, the numbers speak for themselves:
The total amount of money raised in 2012 was $2.7 billion; in 2015 it was $34.4 billion. This makes it 12 times more in just 3 years. Experts predict that by 2025, the sector will have reached $300 billion. Real estate crowdfunding, as a part of the whole industry, is also gaining momentum. Last year, it grew to 3.5 billion. This same year online platforms dealing with real estate crowdfunding raised more than $100 million in the USA.
And guess what?
These figures are good, but what's better is the future prospect of this market. The US real estate market is estimated to be $7 trillion, so there is plenty of room for incredible growth. However, we should keep in mind also the disadvantages of this investment. What are the pros and cons of investing in this relatively new opportunity?
Advantages Of Real Estate Crowdfunding
Every coin has two sides. A smart person should always consider both, a smart investor should know them in detail. There are many benefits stemming from investing in real estate crowdfunding projects. They are definitely affordable, convenient and transparent.
Let's examine them in detail:
It's Affordable Aand Convenient
When we talk about investments, indeed it's important for them to be affordable.
How many people have the resources to purchase a rental property, which costs hundreds of thousands or even millions of dollars? However, the situation with real estate crowdfunding is more optimistic. Alongside many other people, you can buy a piece of property using one of the many platforms.
Sometimes the price of entry is as low as $1000, but usually, it's around $5000. This depends both on the platform and type of real estate – but probably you don't need a mortgage or consider how to improve your bad credit score.
In addition to that, the platform you are using is doing all the work for you – finding the best properties, listing them, etc, which is very convenient for busy people. All you need to do is find the best crowdfunding website, a place that you can trust.
Gives Freedom To Choose
Investing in real estate crowdfunding gives you a sense of freedom and independence.
Often, this option is compared to investing in real estate investment trusts (REITs). They are managed by professionals who decide what, when and how to invest your money as a participant. But here's the point:
You cannot make decisions on your own.
Investing in real estate crowdfunding, on the other hand, give you the freedom to research and find the properties you wish. What's more, knowing your investments is always a great way to monitor them and know what to do if problems arise.
Build A Diversified Portfolio
Diversification is a basic principle all businesses respect. There are so many different platforms that offer a wide range of projects and properties. An investor has the freedom to build a diversified portfolio by investing in many different real estate classes.
We go back again to REITs. If you are a member of a REIT, the information you get is pretty limited since you are not in charge of the investment policies.
On the other side of the coin: Real estate crowdfunding is done via online platforms.
This means that everything is clear and transparent. Investors have unlimited access to information regarding their assets. All respectable platforms dealing with this business are safe and secure. They provide possible investors with all the details before they put their money.
Since crowdfunded properties are not publicly traded, unlike other investments such as stocks, currencies, and commodities – the price of the real estate cannot fluctuate depending on the market. REITs, for instance, offer their investors stocks whose price moves up and down all the time.
Therefore, various external factors (Such as interest rate changes) can affect the prices of stocks. The value of a crowdfunded property will stay the same no matter what happens to the economy.
Disadvantages Of Real Estate Crowdfunding
In the world of investments, everything hides some risks.
Before being too optimistic, you need to take a look at some of the negative aspects associated with real estate crowdfunding. If we think about it, we can easily turn most advantages into drawbacks. For example, the fact that crowdfunded properties are not publicly traded makes them immune to market fluctuations but also illiquid.
No Dividends And Low Liquidity
Unlike REITs that pay their members, participation in a crowdfunding real estate campaign does not distribute any dividends. Additionally, there is a “lock-in” period (from six months to 10 years) waiting for a loan maturity or the sale of the real estate.
Even though, as we mentioned, REITS are volatile, they are also more liquid. Investors in REITs own shares which they can easily sell. So, if you are used to getting regular income from dividends, crowdfunding does not provide investors with this option.
You Are Not The Owner
Investing in real estate via crowdfunding does not make you an owner of the property. You rather have shares of a company, which is the owner of the previously mentioned real estate.
Of course, you have the right as a shareholder to share the company's profit, generated at the property. All these details are mentioned in a document called Operating Agreement.
Not In Charge Of The Property
This is also a drawback to consider. As an investor, you will find yourself in a position of not being able to make decisions. Yes, you have the opportunity to choose the property, the platform you are using, but once you join the crew, there's not much room for creativity. The platform or the person who manages the property will make decisions and, for example, let tenants in or sell it. Your role will be passive and you won't be able to participate in the process of property management.
Unsafe And Unsecured Investment
Unlike traditional real estate investment, no one knows for sure if the project will ever be finished successfully. Plus, you are on your own when deciding which platform to choose and which property to invest in. You might end up losing your money. Besides, most projects are not secured.
And what’s worse?
Another thing that makes it risky is the abundance of scammers. Since its a relatively new field of investment, con artists thrive. You should be careful and do research the platform and people behind it before putting your money.
There are lots of hidden fees investors ought to be aware of before buying a piece of real estate on a crowdfunding website. The range of fees investors have to pay is incredible: from their purpose to their size.
For example, platform fees, construction fees, management fees and much more. Sometimes, fees are so hefty that they undermine returns on the investment.
All in all, just as in any other case, real estate crowdfunding has its pros and cons. It's important to know your style as an investor and consider carefully the benefits of this option. As any other investment, you have to evaluate the potential risks stemming from such investments.