Real Estate Crowdfunding
Crowdfunding has become a popular structure for those looking for capital for all sorts of things. Maybe you have a new product you want to produce. Perhaps a business idea that needs funding. Whatever the case may be, peer-to-peer funding is one of the better strategies to utilize.
If you are looking to get into the real estate investing game, crowdfunding may be a good starting point. You don’t need a lot of money to start, there’s plenty of diversity and you can start earning right away.
In the following, we’ll explain exactly what real estate crowdfunding is and some basics to get you started. Remember though, we’re not offering financial advice, merely explaining how this type of investment works. Be sure to consult with a financial planner before investing in anything.
What is Real Estate Crowdfunding?
Investopedia describes crowdfunding as “the use of small amounts of capital from a large number of individuals to finance a new business venture.” Obviously, it doesn’t stop at business funding. Real Estate Crowdfunding is when multiple investors pool their money to invest in a property.
Instead of needing tens of thousands of dollars (or more), you can invest in a property for as little as $1,000. This is a great way to ease into the world of real estate investing, especially if you don’t have the needed capital. Another bonus, is that you don’t have to put the sweat equity into a flip or worry about being a landlord.
Once you decide on a property you wish to invest in, the developer, along with all the investors sign a partnership agreement. The developer is usually the general partner while the investors are limited partners. Once the project is ready to go, all investors get ownership documents and will be compensated based on the amount they’ve invested.
Top Reasons for Real Estate Crowdfunding
One of the main reasons not mentioned already is diversification. Investing in alternative assets like real estate, is a great way to diversify your portfolio. Stocks, bonds and mutual funds are the norm, but hard assets will do wonders for you. If you have the capital, why not just invest in a property or two? Diversification! First, crowdfunding sites do all of the work. You can browse a catalog of properties and choose which ones work for you. Next, it’s important to also diversify your real estate investments. By that, I mean you need different markets along with different types of properties. These can be residential homes, businesses, and even hotels. By investing across the country, you don’t limit yourself to the investments that are close to you.
Returns are fairly decent at 8-15%. However, not much needs to be done once you pick the properties you want to invest in. Further, real estate crowdfunding fees generally range from 1-3% – not too shabby. Lastly, you can use retirement funds for the investments. Self-Directed IRAs will allow you to put those funds into alternative asset investments. Crowdfunding has become extremely popular with self-directed retirement investors.
Where To Next?
The two most popular sites for real estate crowdfunding investments are RealtyShares and PeerStreet. However, there are hundreds of other sites out there. Unlike GoFundMe and Kickstarter, these sites only focus on real estate investments. Generally, you can set up a free account in a matter of minutes and browse available listings. There is a caveat – you have to be an accredited investor for most sites. This means you need a net worth of $1,000,000 or have a high annual salary (around $200,000).
If you choose to invest retirement funds, you’ll need to self-direct them. IRA Financial offers both Self-Directed IRAs and Solo 401(k) plans (if you are self-employed). Both accounts have Roth options as well. They’re fairly easy to set up and will allow you to make real estate investments with our Checkbook Control structure. The biggest advantage in using retirement funds is that all gains flow back into the account and accumulate tax-deferred. If you choose the Roth option, all qualified distributions are tax-free.
Should You Make Real Estate Crowdfunding Investments?
As with every type of investment, it depends on your financial goals. There are two types of real estate crowdfunding investments you can make: Equity and Debt. Equity has the potential for higher returns, however you’ll have to wait until the project is complete and sold. Debt, however, allows you to receive profits monthly based on loan amounts.
Equity investments are riskier and take time to see bigger profits. Debt investments may be a better choice for retirement account investors. Again, speak with a financial planner to see what’s in line with your goals.
Diversity is huge within one’s portfolio, either within or outside of retirement accounts. Real Estate Crowdfunding is not for everyone, especially if you are not an accredited investor. However, if you are looking to broaden your real estate investments, it’s worth looking into.