Real estate entrepreneurs have been “crowdfunding” their real estate investment ventures since the beginning of time. What has changed is that with crowdfunding, business owners, investors, and entrepreneurs can raise money, not just by getting a loan from a bank or by asking people they know, but also by reaching out to a much larger pool of investors through the internet. Looking for different passive real estate investment opportunities? Read more to learn about how real estate crowdfunding is a means of investing passively in real estate.
According to the Urban Dictionary, crowdfunding is “Hipster/tech speak translated to begging for money over the internet.” We live in a world of Kickstarter and GoFundMe campaigns where people are asking you to fund their project to develop a Pirate Pancake Griddle or this guy who got the internet to give him money to make potato salad. Crowdfunding is not just about start-ups and crazy ideas, it has developed into so much more. Now, it also describes the vast array of opportunities to invest in start-ups, product developments, business ventures, and even real estate.
Crowdfunding is democratizing real estate investing.
Crowdfunding websites provide a clearinghouse for people and entities needing investment funds to reach out to investors looking for opportunities to invest.
Finding opportunities to invest in property syndications or privately traded REITs used to be about being able to access the kind of social and business circles where people with money found out about opportunities to invest in exclusive investment products from other people with money. Instead, crowdfunding offers you, the smaller investor trying to grow your wealth, opportunities to access investment opportunities without being in some sort of exclusive club.
Is this a good thing?
The answer to this question is a resounding “Yes” and “No”! Crowdfunding, and the internet that has allowed it to happen, is a great thing in that it has opened up the world of investing to many more people. But, there are some caveats.
Investing through a crowdfunding website can make investing seem easier than it really is.
In many ways, crowdfunding websites make investing seem easy – create an account, and with just a few clicks, you can invest your money! In the first article on passive investing in real estate, we talked about the importance of always investing time and effort to gain knowledge about investment opportunities and to fully understand the level of risk involved. This is no less important when investing through a crowdfunding platform. Don’t let a flashy platform lull you into a false sense of security.
Crowdfunding is the platform, it’s not the investment.
There has been an explosion of crowdfunding platforms operating in the real estate investing space in recent years. Search for “real estate crowdfunding platforms”, and you will see just how many there are.
The typical role players in an investment offered on a real estate crowdfunding site are not different from investment opportunities advertised in other ways. There will still be a sponsor and a property management team in a property syndication, or a real estate investment company that establishes a REIT. A crowdfunding platform is only a vehicle or conduit giving you access to investment opportunities.
Do your own due diligence.
Different platforms do different levels of due diligence on the investment opportunities they publicize and make available on their websites. Don’t assume that an investment opportunity that you find on a crowdfunding website is legit just because it’s on a website, do not assume that because the website looks super professional, or the website has good reviews it’s trustworthy. There are some regulations of the crowdfunding industry, and requirements or restrictions on what these platforms can do depends on whether a crowdfunding platform acts as a broker/dealer or is “just” providing a platform and does not take liability for the quality of the investment opportunities on their website.
A further consideration is how the investments types offered on crowdfunding platforms are regulated by financial authorities. For example, regulation of property syndications and REITS by the Securities and Exchange Commission are quite mature, regulation of other investment types is still developing.
Investing in debt or equity for real estate developers is a growing area of crowdfunding. Pay attention to how (or if) the platform reviews, the creditworthiness of the developer, whether the loan or the equity is secured by the property, and what are your chances of getting your money back if things go bad. Also look up the people involved, ask others in the industry about them that way you can gauge their reputation. A simple Google search can provide a lot of information about a person who’s done wrong to others.
Take home message.
Innovation is good. Democratizing the world of investing is good. Always understand what you are ultimately investing in and do your own due diligence. Finally, remember crowdfunding websites are only vehicles – vehicles can have safety features built into them, but it is ultimately the driver who takes responsibly for driving safely and responsibly!
Read Real Estate Syndication for more about real estate investing.
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