Real estate crowdfunding is all the rage, with new crowdfunding review websites and investing platforms cropping up across the internet. The real estate crowdfunding industry is opening up direct investment into predominantly commercial real estate for both accredited and non-accredited investors.
A McKinsey report written by Samvit Kanoria and Hasan Muzaffar states that “real estate can yield high returns, and it’s useful for diversification and as a hedge against inflation, but many see it as a high-risk play.”
Yet, most diversified institutional and individual investment portfolios include real estate. It’s clear that real estate is a solid asset class, and there are many ways to invest in real estate.
Real estate investing options include:
- Buy a single family home and rent it out.
- Buy a multi-family home and rent it out.
- Buy distressed property, fix it up and resell it.
- Buy a real estate investment trust (REIT), either broadly diversified or targeted to a specific niche.
- Invest in crowdfunded real estate.
But just because you can invest in real estate doesn’t mean you should. Find out if crowdinvesting is worth it for you, or whether you should look to other real estate investment options.
Pros and Cons of Real Estate Crowdfunding
First off, what is real estate crowdfunding?
The real estate crowdfunding marketplace is where real estate developers can tap individuals for investment capital and individuals can invest in formerly unavailable real estate projects. Crowdfunding allows project developers to bypass the traditional banking system and go directly to the public to fund their projects.
Like any other type of investment, there are pros and cons of crowdfunding in real estate.
Advantages of Real Estate Crowdfunding
Crowdfunding can offer investors a way to participate in real estate deals that were previously unavailable.
Unlike investing in publicly traded REITs, crowdfunding lets you invest in a specific property. Realty Mogul, one of the earliest platforms offers qualified investors the opportunity to invest in single properties, often called private placements or the company’s own REIT.
Real estate offers the opportunity for high returns.
While Diversyfund caters to both accredited and non-accredited investors. Non-accredited investors can participate in their REIT fund which buys, renovates and resells properties allowing investors to participate in the profits. Diversyfund claims that investors received 17.3% returns in 2018.
Another pro of crowdfunding is that commercial real estate returns are typically less correlated with those of the stock market. This is important now, more than ever as we witness unprecedented stock market volatility and uncertainty. Additionally, the returns offer both steady income, from rents and potentially large capital gains when a property is sold.
Although we’re in a period of low inflation now, inflation is bound to increase at some point in the future. Real estate is widely accepted as a hedge against inflation.
There are a wide range of crowdfunding investment opportunities for both the small and large investor. Although the numbers of crowdfunding sites continue to expand, their quality also varies. So, carefully vet any real estate crowdfunding platform before investing.
Disadvantages of Real Estate Crowdfunding
Crowdfunding may be ideal for some investors, but not all.
When investing in a single property, risk levels rise. Plans to renovate, increase rents, and resell a commercial property may not go as planned, curbing potential returns. There might be an unforeseen economic scenario or difficulty finding a buyer or tenants, which might hurt potential profits.
Most real estate deals in crowdfunding are illiquid and require long holding periods. The deals state the anticipated holding period, generally at least three years, although crowdfunded REITs might be easier to sell. This suggests that investors must go into these types of investments with a long term view, using money they can afford to leave in the platform for long periods.
It might take a long time to realize the crowdfunded profits. If a property is being renovated before renting and selling, during the repair period, there’s no cash flow to investors.
Although there are real estate crowdfunded deals for small investors, most are designated for wealthier accredited investors.
Is Real Estate Crowdfunding Worth It for You?
Whether crowdfunded real estate investing is for you or not depends upon several factors: your net worth, your time horizon, your risk tolerance, your total investable assets, and your portfolio diversification preferences. Additionally, real estate crowdfunding is a newer investment class with less time for evaluation than REITs and real estate mutual funds.
To decide whether crowdfunding is for you or not, do your homework. Research the available real estate crowdfunded platforms. Evaluate the deals. Determine your eligibility for the investment opportunity. Ultimately, crowdfunding in real estate might be right for you if you have a long time frame, a diversified portfolio and the ability to handle a risky investment.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.