Real Estate Investing 101: Crowdfunding

What is it? Crowdfunding involves collecting funds from a large pool of investors to fund a project or venture. Crowdfunding may have become popular more recently, but it’s actually an ancient business model. Imagine a bunch of small farmers in a village a few hundred years ago pooling their resources to build a grain store or irrigation system. Back then, you needed to know your community and have shared needs or goals.

Fast forward to today: crowdfunding is facilitated by the internet, and investors are people who have never met each other. Crowdfunding can be used to fund a wedding, a new invention, a software start-up, or a real estate project. If we look specifically at crowdfunding of real estate projects, we refer to pooling funds from investors to purchase property or fund the development of a property and then paying returns to investors with the proceeds from the property e.g. rental income or appreciation once it is sold.

Minimum amounts for investing can vary, but generally, it takes less money to invest in a crowdfunding project than to buy a property on your own.

What do you need to know?

· How it is regulated. Crowdfunding real estate investments fall under the category of equity-based crowdfunding and are regulated by the SEC (Securities and Exchange Commission). Since the investment market is changing so quickly and new websites and companies are popping up with new and innovative offerings all the time, the regulation is struggling to keep up. Before handing over your money, take your time to understand how the regulation of crowdfunding real estate projects works in general and how the particular real estate investment project you are considering is regulated. The SEC website is very informative, and you should spend some time there. For example, start here.

· Diversification does not remove risk. A big benefit of investing in crowdfunded real estate projects is that you can put relatively small amounts of money into several projects rather than putting all your money into one project. However, if the underlying investments are risky, they are still risky regardless of how diversified you are. The rule is: Diversification is good, managing risk is good, and you should do both!

Is crowdfunding right for you?

By lowering the bar for entry into real estate investment, crowdfunding offers more people the opportunity to get real estate into their investment portfolio. Another attractive feature of investing in crowdfunded real estate projects is that the investment is passive. Yes, you should take time to learn about the project before investing and keeping an eye on it by reading any reports you receive, but you are not involved in managing the property. You don’t deal with tenants, maintenance and repair, or making improvements.

Bear in mind that these benefits can also be enjoyed by investing in paper-based securities, such as REITs or stocks in real estate companies. These are more established forms of investing with a stable regulatory framework. But because they are more conservative and “boring”, you may not get the kind of returns currently offered by crowdfunding. This is something to consider.