In the past, direct investments in real estate have been a privilege of either institutional investors or high-net-worth individuals. Property development is a capital-intensive venture, which can pose a high barrier to entry for the average investor.
The average salaryman is unlikely to have sufficient capital to directly purchase or fully fund a property.This is why this asset class is less appealing than stocks, which allow people to buy fractional units of a company and require less upfront capital.
However, with the upsurge of crowdfunding in real estate, this barrier to entry has been greatly reduced. Relying on the principle of finding strength in numbers, crowdfunding is the practice of raising funds for a business venture from multiple investors, who have the freedom to decide how much they want to commit.
In the context of real estate investing, crowdfunding platforms pull together small amounts of funds from different investors to finance real estate developments.
What are the advantages of real estate crowdfunding?
Access to different market opportunities
Real estate crowdfunding allows individuals to hold a stake in a property that was once only accessible to the affluent. Anyone with as little as a few hundred dollars can finance real estate projects on these crowdfunding platforms.
You can even choose to spread your money across multiple developments and sectors all over the world, such as residential units, commercial spaces, and industrial buildings, among others.
Lower risk with stable cash flow
Depending on a property’s profitability, capital value appreciation, and rental income, crowdfunding platforms typically offer competitive returns.
Most real estate crowdfunding sites provide returns ranging from 7% to 16%, compared to 9.2% for stock market returns. You can also easily capitalise on these assets, without worrying too much about stock market fluctuations, as real estate is historically lowly correlated with other asset classes.
No burden of property management
Owners and landlords of physical properties have to oversee due diligence, tax filing, space management and renovation matters, as well as finding long-term tenants to draw rental income.
With third-party real estate crowdfunding sites, all that heavy lifting is removed from your plate. This gives you more time to focus on other more important things, while leaving your money to grow in safe hands.
Ease of getting on board
For most of these crowdfunding platforms, it is very easy to get started with real estate investing. All you need to do is to create an account, browse for investment opportunities and decide which ones to invest in. Once that is done, you can track the performance of your investments through an app or website.
Technology makes things better
One of the plus points of getting involved in real estate investments through crowdfunding is the leveraging of technology. As an investor, you would want to be privy to all the information on your deal, be it the potential risks or market opportunities.
Some crowdfunding platforms allow you to do just that, as such details are made transparent and available to you 24/7. Powered by data, technology and research, these sites deliver what you need to know in an open and efficient manner.
What are some disadvantages of real estate crowdfunding?
Less liquidity
In this aspect, some investors might prefer to park their money in real estate investment trusts, or REITs. This is because REITs are publicly traded and listed on stock exchanges, which makes it easier for investors to buy and sell them off for quick cash.
However, in real estate crowdfunding, the amount you put into a property is tied up for longer periods until the property has been divested. This makes it more of an illiquid asset, since you cannot cash out your invested monies, should it be required for emergency reasons.
Investors need to have knowledge of real estate investments
With every asset class that you invest in, there are inherent risks that are difficult to avoid. Real estate investments can prove to be daunting for those who do not conduct proper research and due diligence. Those who possess little knowledge about the local markets or a project’s sponsors will be at a disadvantage.
Particularly for crowdfunding platforms, it can be tricky when the project you have invested in goes south, or if the site winds up altogether. So, it is important to always stay well-informed and on top of your investments.
A nascent industry that has not proven its sustainability
Although real estate investing has been around for a long time, this method of investing through crowdfunding is a relatively new idea that sprouted less than five years ago.
Those who are cautious about crowdfunding real estate cite concerns relating to anonymity issues, and they would prefer to be in direct contact with property developers or sponsors before taking the plunge.
Sceptics would have reservations about these crowdfunding platforms’ long-term performance, and fear that some of them may not be sustainable in the future.
What does the future of real estate crowdfunding look like?
Despite the risks of real estate crowdfunding platforms, we should not discredit the potential opportunities that this investment option offers to investors. This is an attractive alternative way to invest in real estate for retail investors who do not have the means to invest in large amounts of money.
But investors should do their research and educate themselves on the industry, market sectors, and crowdfunding platforms, before committing to any investments. When done right, investing in real estate through crowdfunding platforms can become the next big thing, and investors will be able to benefit from this investment vehicle.
Getting started on RealVantage, a real estate co-investment platform
A platform founded and run by industry veterans, RealVantage offers a smart way to invest in real estate. By offering institutional-quality real estate deals globally, this co-investment platform empowers investors to build a diversified real estate portfolio.
When assessing deals, every deal is thoroughly analysed, optimally structured, and rigorously tested, so only high quality opportunities are presented on their platform.
This rigor is demonstrated by their strength in execution, where the firm has funded 29 deals to-date, and have a track record of 100% of distributions made on-time to its investors.
Join the community of real estate co-investors on RealVantage today.
