Equity real estate crowdfunding is basically private equity being made available to the general, non-institutional investor. Your capital gets pooled with other investors’ capital and invested into a single project. Out of experience, I’ve invested in real estate crowdfunding myself, and I’ve seen consistent returns without having to stress about the tangibles. This article outlines both the positives and the negatives of real estate crowdfunding.
In addition, I’ve also added a few tips and platforms you can use if you’d like.
Positives of Real Estate Crowdfunding
If you’re an investor with a limited amount of time on your hands, investing in crowdfunded property is ideal as you don’t have to deal with any un-asked-for issues. In addition, diversification between assets with crowdfunding is easier, since investment opportunities aren’t as capital intensive.
The question of investing in REITs (real estate investment trusts) if you’re time-constrained might beckon, but the fact of the matter is that real estate investment trusts require significant know-how of how the stock market works. You’ll often find that your investment is trading separate from its intrinsic value due to systemic reasons.
The final benefit I’d like to outline is the access to deal flow. You’ll have access to global deal flow when choosing real estate crowdfunding. If you decide to invest in tangible property, investing cross-border can be a hassle.
Although REIT investments are popular in the United States, they face listing difficulties in many jurisdictions, disrupting the deal flow.
In addition to the regular private investing risks, real estate crowdfunding presents some unique challenges.
In most cases, you’re invested in an illiquid asset in this sector. There are platforms where you can sell your investment in a secondary market, but it will usually be significantly discounted.
In addition to the lack of liquidity and potential discounts you’d be selling at, the transaction fees of some platforms can be high. Many platforms also require investors to transfer funds through third-party payment systems such as Paysera or Transferwise.
The last negative I’d like to discuss today is restrictions on investment. Many platforms have a maximum amount that a single investor is allowed to invest per year. As a real estate investor, you’d ideally be looking to invest the equivalent to what you would in tangible property; otherwise, the economic prospects probably just doesn’t make sense.
The two top valuation techniques I’d like to run through today are pivotal to investing in any real estate crowdfunding deal. You can be presented with a game-changing high-rise opportunity but the most important factor of all is that the deal actually makes sense.
- Cap Rate: Cap rate is what you should demand as a return. It’s calculated as net operating income divided by the current market value of the asset. You can use this formula dynamically. An example of how the formula can be used is if the deal promises an inevitable return, you can plug the return in on the left side of the equation and see which numbers will result in the desired outcome.
- Comparable Transactions: Comparable transactions can be used to judge both income and value. If you’re invested in the long-haul, you’d probably like to scan the area for similar properties and see what they sold for and what the rent is. Draw a sample size of five to 10 properties and see if the numbers for your target deal make sense.
Other things to look out for are the amount of leverage for the project, the credit scores on loans, the reputation of the developer, the market and currency risks.
A Few Platforms
- Republic: Republic initially started as a regular equity crowdfunding platform but has since branched out to add real estate crowdfunding projects. The listings generally include high-rise developments in the U.S., and investors can participate for as little as $100.
- CrowdEstate: This platform is based in Europe but is open to all investors. The platform facilitates residential developments presenting returns that can run as high as 16%. The platform uses many details with detailed prospectuses drawn up describing collateral, developing company, and comparable transactions. CrowdEstate also has a secondary market, and the minimum investment is £50.
- CrowdStreet: This is a platform for investors who’re looking to up the ante. CrowdStreet requires a minimum investment of $25,000. The platform aims to bring institutional-level real estate to ordinary investors. The value lies in their vetting process and the fact that returns can be up to 26%!
The Final Word
Equity Real Estate crowdfunding can be rewarding as returns are high, the minimum investment is low, enabling easier diversification. Investors should note that default rates are still high on these platforms, and not many backs your initial investment. Real Estate Crowdfunding should be part of a diverse portfolio and ideally not your only type of holding. Feel free to contact me directly if you have any questions!
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks
On the date of publication, Steve Booyens did not hold any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.