Once you’ve secured your funding, your contributors will become invested in your success, and will go the extra mile to help you succeed. But how does real estate crowdfunding work? What are the benefits of crowdfunding real estate deals? What do you need to know about looking for real estate investment loans from the masses? And what returns could you get by investing in another investor’s crowdfunding project?
Though real estate crowdfunding is not a traditional means of raising capital, it is important for investors to understand this powerful form of real estate financing.
What Is Real Estate Crowdfunding?
Crowdfunding is a way for business owners to raise money, not by asking one investor for a huge investment, but by reaching out to a large pool of investors who each contribute a small amount of money. For this type of investor, real estate crowdfunding essentially has two options: equity investments and debt investing.
Equity Investments: Pros & Cons
This is the route most real estate crowdfunding investors take, mainly because it provides a higher return than debt investing. Equity investments give investors an equity stake in a residential or commercial property, effectively turning them into shareholders.
If you choose to invest this way, your return will be based on the rental income of the property, minus fees needed for the crowdsourcing platform. If the owner fails to pay the loan, you can recover your loss via a foreclosure action.
Shorter hold time: Since debt investments are usually done with development projects, the holding period only stretches from six to 24 months.
Higher fees: Once you decide to invest, the crowdfunding platform may take a percentage off of your payout.
Capped returns: Debt investments are calculated based on the interest rate of the owner’s mortgage loan. By providing consistent results, your investors will develop a sense of loyalty, which can lead to positive word-of-mouth marketing, repeated business and direct referrals.
User Friendly Platforms Available
Many real estate crowdfunding sites make it easy for investors to launch their fundraising campaigns, thus saving them time and money. A key difference between crowdfunding and more traditional methods of raising money, is in the platform used, as crowdfunding is usually done online.
Along with crowdfunding websites, business owners turn to social media platforms such as Facebook or Twitter to market their ventures directly to wider audiences of interested investors.
Real estate investors have adopted crowdfunding as an alternative to more traditional means of financing investments. As such, your yields will be limited.
. Crowdfunding is more than just a 21st-century buzzword; it’s a new, exciting way for real estate investors to raise capital. If the property does not attain a profit, you will not get any return on your investment.
Longer hold period: If you want more liquidity in your portfolio, equity investing is probably not for you. When launching your first campaign, some of this feedback can be a great way to learn how to improve your campaigns in the future. Investors can benefit from real estate crowdfunding by keeping their personal credit free and available for other uses, while keeping their personal credit scores in tact. You may be looking at a potential of an 8 to 12 percent annual return.
Less risk: You have less risk with debt investments, since the property owner will be the one to secure the mortgage loan. For example, large developers are using crowdfunding platforms to solicit investments from groups of accredited investors, while small business owners have launched campaigns to raise funds for smaller investment deals. In the event the property is sold, you will also earn a share of its appreciation value. The holding period usually lasts for five to ten years.
Debt Investments: Pros & Cons
Debt investing, on the other hand, means the investor (you) are basically the lender to the property owner. Responding and thanking users for leaving the time to reach out can help you open up lines of communication and develop genuine connections with new contacts.
In addition, it is important to recognize that there is a learning curve for those who have not yet participated in crowdfunding. This helps to demonstrate your credibility and professionality to interested investors.
Builds Investor Loyalty
A crowdfunding campaign is a smart way to prove the appeal and financial viability of an idea or project. Furthermore, crowdfunding has become associated with several other notable benefits, including:
Crowdfunding real estate increases your funding options while growing your investor network.
Direct marketing through crowdfunding also doubles as a tool to promote your business.
Successful projects will lead to positive word of mouth and client loyalty over time.
Save time and money by taking advantage of a user-friendly investment platform.
Gain access to valuable feedback from your online community so you may address any business flaws.
Easy Access To Capital
Crowdfunding offers easy access to credit and capital without all of the hassle of getting a loan, and is used for virtually any type of fundraising effort you can think of: personal, familial, business and real estate investing. It can also be an opportunity to introduce the concept of crowdfunding to those who are not yet familiar.
Types Of Crowdfunding
Up until this point, we have discussed the concept of crowdfunding through the lens of a borrower. Be sure to keep reading to discover some of the best real estate crowdfunding platforms available today.
Way To Gain Valuable Feedback
Due to the public nature of crowdfunding, campaigns will be subject to reactions, with or without invitation. However, this is a great opportunity for business owners to monitor user comments and gain valuable feedback. The section below illustrates why real estate crowdfunding has grown in popularity among investors in recent years.
Benefits Of Crowdfunding For Real Estate
Whether you’re just beginning your real estate investing journey or you’re a seasoned pro, locking down the necessary financing to fund a deal can be a challenge. This allows small business owners to get their companies up and running more quickly, and also help secure funding for deals when more traditional options are limited.
Great Marketing Tool
Aside from the direct benefit of funding, crowdfunding lends itself as an excellent marketing tool for business owners who would like to promote their brand. By providing compelling information through the campaigning process, you can attract potential investors and garner support. By promoting fundraising campaigns through social media and directly on crowdfunding platforms, real estate investors have an opportunity to rapidly grow their investor network. And since you are in debt investing, you will be have priority during property payout.
Steady returns: You are more likely to predict how much and when you will receive your payout, thanks to how the investment is structured. Payouts are typically sent every quarter.
The Sky is the limit on returns: You can see (at times) an 18 to 25 percent annual return, with the possibility for more, since equity investments do not have caps on them.
Lower fees: You have the option to pay an annual fee to maintain your shares on the property, instead of upfront fees and monthly fees.
Tax benefits: Since you own a share of the property, you can deduct expenses on it from your annual income tax (e.g. You receive a fixed return based on the interest rate of the owner’s mortgage loan, as well as the amount you have invested.
Payments are usually given every month or every quarter. However, this also presents risk. For example, pay attention to input left from other experienced investors, or even criticism as a way to identify and fix business flaws. Now, let us say that you are a real estate investor who has built up some capital, and now you are looking for ways to grow your wealth a bit more passively. depreciation, repairs).
Riskier: You will be second in line for payouts. These platforms are designed to showcase campaigns in a visually appealing manner, while allowing fundraisers to reach a large audience without excessive effort. A best practice is to provide a credibility package on your website, showing past projects and returns, along with your company’s mission and goals. With its advent in the real estate sector, many investors have taken advantage of crowdfunding as an alternative way of funding their deals.