What are the Pros and Cons of Real Estate Crowdfunding?
Real estate crowdfunding is a relatively new method of investing in real estate that allows individuals to pool their money together and invest in properties or real estate projects, via real estate crowdfunding platforms. I've been investing myself in such deals for over 10 years now. As for all forms of investing, it comes with its own set of pros and cons. In this article, I will explore the benefits and drawbacks of real estate crowdfunding and help you decide if it's the right investment strategy for you.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a way of investing in real estate that allows individuals to combine their money together to invest in real estate. It is a form of crowdfunding, which is a way of raising capital from a large number of people, typically via dedicated real estate crowdfunding platforms.
In real estate crowdfunding, investors can invest in a variety of real estate projects, such as the development of a new property, the renovation of an existing one, or the purchase of a property that is already generating income through rental payments. The investment can be in the form of debt or equity, and the investment amount can be as small as a few hundred dollars or Euros, sometimes even less.
The process of real estate crowdfunding typically starts with a developer or property owner listing a project on an online platform. They provide detailed information about the project, such as the location, the expected returns, and the timeline. Investors can then review the information and decide if they want to invest in the project. Once the project is fully funded, the developer or property owner can proceed with the project, and investors can earn a return on their investment.
Benefits of Investing in Real Estate Crowdfunding
Let's now see why it's a good idea to invest in real estate crowdfunding. Well first, the one I prefer: it's completely passive! Compared to traditional real estate investing where you will have to manage your property, find tenants, make sure everything works - here it's all managed for you by the platform. The only thing you have to do is select the right properties you want to invest it, invest money, and then let people from the platform manage everything for you. As a really busy person, this is clearly a very strong argument for real estate crowdfunding.
Another benefit is that it allows you to diversify your investments across several properties, as you can usually invest from a few hundred Euros or Dollars in each project. Compare that to a traditional property investment, where you will just invest in one property only usually, as you need a downpayment and a loan.
Yields are also usually better in real estate crowdfunding, as it allows you to invest in areas that you would never have thought of, where yields can be better than around you.
What I also really like is that it allows you to invest right away, whatever your current financial situation. Indeed, it's not rare now to have banks require a 30% or even more downpayment to buy a property, and on top of that they are less and less inclined to give out loans. Here, you don't have to ask anyone for permission.
And last benefit that I really like - it's all online! When I bought a traditional property investment, I had to go see it, then go to the real estate agency, to the notary ... a lot of time and money lost. Here, you can manage everything from your web browser or even a mobile phone as many platforms now have apps.
Are There Any Drawbacks to Real Estate Crowdfunding?
So is everything perfect? For sure not, there are drawbacks to everything, and here are two that are present in real estate crowdfunding.
First, you can't get a loan to invest. It's an advantage that you don't need one, but getting a loan in real estate means you can also leverage your investments, and get more value that the actual money you have in the bank. That's not possible for real estate crowdfunding, so you will only be able to invest the money you actually have on your bank account.
There are also no tax incentives (so far at least) with real estate crowdfunding. In many countries governments have incentives programs that allow you to reduce taxes when investing in real estate, but that's not the case for real estate crowdfunding. So that's another point to consider if you are investing mainly for tax purposes.
Should You Invest in Real Estate Crowdfunding?
You can probably tell from the article that I really like real estate crowdfunding as an investment. It is a great way to invest right away in real estate, have a really diversified portfolio with great yields, and especially it's completely passive. There are a few drawbacks, but that for me are not really significant compared to all the benefits.
So if you want to learn more, how to get started? I actually created a guide to help you get started in real estate crowdfunding, that you can get here for free.