Benefits & Risks of Real Estate Crowdfunding

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Image depicting the benefits & risk of real estate crowdfunding

Real Estate Crowdfunding has been attracting a lot of attention in recent years. Crowdfunding simply means raising capital from a large pool of small investors. Traditionally people would approach one investor for their capital requirement, Crowdfunding platforms offer an alternative of raising the same amount of capital through many investors. The Real Estate Market has opened up to Crowdfunding as it offers a plethora of benefits to both investors and borrowers.

Real Estate is one of the oldest and most trusted asset class. For years, people have earned good returns by investing in real estate. Let’s take a quick look at the advantages and disadvantages of investing in real estate:

Benefits of investing in Real Estate:

  • It is simple to understand with no complex ratios or jargons to get your head around.
  • You can increase the value of the asset purchased by working on it (upgrading it). Other investment options like stocks or bonds don’t offer this benefit.
  • Real Estate Investment offers a natural protection against inflation since property prices and rent increase with inflation rates.
  • You have a chance of finding a good deal if you research and analyze the market well.
  • The rental income offers a good second source of income and the property increases in value as time goes by. Hence, you get regular passive income till you are leasing out the property and capital appreciation on sale.
  • Even if you have to take a housing loan to purchase the property, the rental income can help you to cover the instalments. So, your loan gets repaid while your property appreciates in value.
  • Real estate properties make good collateral for emergency loans.

Disadvantages of investing in Real Estate:

  • One of the biggest disadvantages of buying a property is the lack of liquidity. Unlike other assets, real estate cannot be sold quickly without drastically reducing the price.
  • Real Estate requires regular maintenance and care. This implies recurring costs and investment of time.
  • A housing loan can turn into a liability if you lose your primary source of income.

How Real Estate Crowdfunding helps to fight the disadvantages:

Due to the potential of offering great returns, one cannot avoid investing in real estate. However, the disadvantages, as listed above, can work as a deterrent to many investors. Real Estate Crowdfunding takes the benefits of investing in real estate and eliminates the disadvantages of buying a property by offering a great alternative to invest in the realty market. Here is how Real Estate Crowdfunding works:

  1. The Real Estate Crowdsourcing platform registers Investors and Borrowers by verifying their credentials.
  2. Borrowers submit a project for which they need funding to the platform.
  3. It verifies the details, runs some background checks and makes the project available to investors.
  4. Investors assess the projects available based on their requirement and choose to invest completely or part of the amount requested.
  5. Once the borrower manages to raise the entire amount, funds are disbursed.

It is well known that purchasing a property involves a huge amount of investment which is a disadvantage. Also, the regular maintenance and care require time and money. Crowdfunding takes both these aspects out of the equation. Many platforms allow investors to invest as low as $5,000 and participate in the real estate market. This ensures that you don’t need to take a housing loan to add real estate as an asset class to your portfolio. Further, it offers equity investment through crowdsourcing making your investments liquid. You also don’t need to worry about the maintenance of the property since the platform takes care of it too.

In a nutshell, Real Estate Crowdfunding helps in eliminating the disadvantages of real estate investments by spreading the investment amount across multiple borrowers. Having said that, there are certain risks associated with Real Estate Crowdfunding too.

Risks:

Most real estate investors are not market experts who can analyze and assess real estate projects easily. So, when you decide to invest through a real estate Crowdfunding platform, how do you assess any project? Most investors rely on the platform to provide good deals which do not require assessment or analysis. This can be counterproductive and pose a risk to investors.

Another risk is that of the Crowdfunding platform going under. Many platforms are now hiring a third-party bank as a custodian of their assets. This can work as a hedge against this risk.

Being new in the market, real estate Crowdfunding landscape needs understanding before you sign the dotted line. Equity / Debt investments, private or publicly traded, public but not listed investments; ensure that you understand these aspects well.

Diversification is known as the key to managing risks in almost all investment vehicles. Real Estate Crowdfunding is no different. While REITs offer an inherent diversification in a portfolio, with Crowdfunding, you need to ensure that you create a diversified portfolio to have a lower loan-to-value ratio.

Finally, the government has started putting some regulations in place for the Crowdfunding market. While the regulations are usually in favor of the investors, there might be some changes which can lead to an increase in charges or slow down the process.

Summing up

Real estate investing adds a strong asset class to your portfolio and is usually recommended by most investment advisors. If you have the knowledge and funds to buy a property and are not worried about maintaining it, then purchasing real estate can offer great returns. However, if you are worried about liquidity and loan-liability, then real estate Crowdfunding can help you to get benefits from the real estate market while keeping your liquidity and loan concerns at bay.

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