Investing Insights: Is Real Estate Crowdfunding the Right Option for You?

Crowd funding is not a new concept. In fact, the idea of raising money from a crowd of people contributing to a central project dates back thousands of years. However, the idea of raising cash by way of an online portal only launched a few years back with the microfinance lending site Kiva.

The majority of crowdfunding projects through Kiva were microfinance loans, or peer-to-peer lending arrangements. These were used to raise capital for small business start-ups in exchange for equity ownership in the business.

People would contribute funding into the project as a type of loan to help someone in a developing country establish a new business that could support their entire family. As the business grew and expanded the business owner would repay the amount contributed by the investor.

Real Estate Crowdfunding for Investors

Fast forward to today and the concept of crowdfunding has expanded and evolved dramatically. Online crowd funding portals now exist for a vast range of business segments, industries and purposes.

There are also portals based on donation-funding for charities and communities, and perks-based funding for other investment ventures. What began as a way for investors to gain some equity share in a business venture has evolved to include paying interest to investors or offering other rewards and incentives for contributing to the fund.

The fastest-growing type of crowdfunding platform is designed to appeal to real estate investors. The objective is to raise funds from a pool of willing investors to allow smaller property developers to complete larger projects. Use Crowdfunding agency for successful marketing.

What Type of Projects Will You Be Crowdfunding?

Developers often find that obtaining finance for deals in the £1 million to £5 million range are more difficult to find via traditional means. Big investors prefer to focus on much larger deals and banks are notoriously stringent on lending policies for projects of this size.

The alternative for those developers is to raise capital by way of investors willing to contribute to a crowdfunding project. The developer gains the cash needed to complete the project, while the investors receive a return on their initial investment in the form of interest paid or by gaining a share of the capital profit derived from the project.

In some cases, the property may be generating rental income, so the investor receives an ongoing share of any profits made from rent received from the tenants after all operating expenses have been paid.

Why Invest in Real Estate Crowdfunding?

Investing in crowdfunding offers smaller investors the opportunity to enter the property investment market with a relatively small amount of cash. There’s no need to worry about obtaining finance, or saving a hefty deposit, or trying to repay a large mortgage debt. You also don’t have the headache of dealing with tenants or management issues.

Investors who want to realise a return on their investment but don’t have the available time to spend scouring real estate listings to locate the right property have the opportunity to invest in property directly. Property crowdfunding portals list investments that are expected to provide a reliable income that is anticipated to exceed what you can earn from leaving your cash in a bank account.

Access to Better Real Estate Investments

Finding good property investment deals can be time-consuming. Individual investors also tend to focus on local real estate markets, so may end up missing out on great deals in other parts of the country.

By comparison, investing into a crowdfunded real estate project offers access to larger projects across the nation. The investor saves time and gains access to a broader range of property investments from right around the country.

The advantage of crowdfunding sites is that they carefully pre-vet each property investment before offering it to investors. Your investment gives you a share of a high-yielding investment property in a prime location with strong rental demand that you may not have otherwise been able to access on your own.

Diversification

Another benefit to investing into real estate crowdfunding is the opportunity to diversity the types of property you invest into. You have the freedom to choose the types of deals, the location of the property, and the type of return you want for your initial investment.

You can also diversify further and consider adding an investment into commercial real estate into your portfolio by investing into a crowd-sourced deal.

Diversification also allows you to reduce your risk by spreading your investment exposure across a range of different property types.

Easy Exit Strategy

Most real estate crowdfunding opportunities offer easy exit strategies for investors who need to cash in their investments. You are able to sell your shares to other investors at a set price. Alternatively, there should be an exit point for each property investment deal that allows investors to take their profits and walk away after a specified period of time.

Getting Started

It’s wise to discuss any investment opportunities with industry professionals before investing any money. Talk to a good accountant about how the potential returns could affect you at tax time and discuss the properties on offer with real estate professionals at ChappellAndMatthews.co.uk.

Overall, real estate crowdfunding can be a great way to derive passive property investment income without the stress or hassle of being a landlord. Before jumping into the realm of crowdfunding, take the time to check whether the platform you’re considering is a member of the UK Crowdfunding Association. Ideally, the company you choose to invest your hard-earned cash with should be operating under FCA regulations and offer full legal protection of shares for each investor.

When you’re sure you’ve narrowed down your options to the best crowdfunding property investment to suit your goals, go ahead and invest.

Nicole Matin has been investing in property for some time and is always keen to explore new initiatives like crowdfunding. She enjoys sharing her tips and experiences online and writes for a number of different property websites.