What are the overall advantages and disadvantages of real estate crowdfunding. So to get things started lets talk about some of the advantages, to those who want the benefits of real-estate investing but just don’t have the time this may be a good option for you. Crowdfunding is more of a capital investment you’re a silent investor you’re getting all the benefits of investing you just don’t have a say in how the money is allocated.
- Broaden Your Investment Options
One of the major benefits is you get to broaden your investment options, you know rather than say put $50,000 into one deal you could possibly spend that among three to four deals. Crowdfunding creates multiple streams of income so that’s another way of thinking about it also allows you to have accessibility to accredited investors. Some of these websites will even vet their members to make sure that they have the right amount of income, so that they continue to fund the deals. Because some of these sites have minimums of $100k, not everybody can do that but if you could participate in these networks, you have a possibility of connecting with some of these other highly successful investors which is very valuable. Since most of this is done online you can check your progress tracker. There’s not much of a paper trail of course in the digital era that always makes things a lot easier at least for some of us. Because you’re not managing or land lording you don’t have to deal with tenants, toilets and trash which is a huge relief. Of course there’s lower fees which means better returns. Some of these websites provide the removal of the middleman no agents no broker, so you can save on those fees which definitely adds up over across several deals saving you a lot of money. Of course depending on who you crowdfund with you can particularly say goodbye to indefinite holding periods. Unlike the money market mutual funds where you get penalized for pulling them out, pulling money out early for crowd funding is a little bit more flexible.
Now Let’s Talk About Some Of The Cons Of Crowdfunding.
- Most Crowdfunding Requires A Minimum Investment
If you’re thinking you can get involved with a few hundred bucks or maybe thousand or two thousand you may not be able to participate most websites have a minimum of $5,000. Another disadvantage depending on the deal is chances are you may not see any type of return for a few months to a year. Especially if you’re investing in a development type deal, where you have to wait for it to be built. Cross your fingers and hope it’s going to be a successful deal, but make sure you pay attention to those types of investments.
- You’re A Control Freak
If you’re a control freak this is not going to be a good fit for you. What that means is you’re a silent investor and purely putting capital in, what you suggest is more likely not going to be heard.
- Lack Of Liquidity
At the absence of a secondary market it restricts easy selling for you to get out. So if for any reason you have an emergency or you need immediately pull this money out it could be rather difficult. Depending on the deal and if it’s a deal that’s failing and you’re trying to pull out, more likely you’re not going to find anybody to take over for you and you could potentially lose all your money. So lack of liquidity is a big one for some investors.
- Risk Of Investment Default
Investment default from real estate developers is higher in crowdfunding than peer-to-peer in any situation where you have a management company. Whether it’s doing well or not it’s going to be a lot harder for you to control it, than say a peer-to-peer 1on1 where your input is actually being heard and executed.
- Less Experienced Are More Likely To Get Stuck
Less experienced investors are more likely to get stuck in a crowdfunding campaign that they cannot afford. Purely to the fact of lack of due diligence many new investors will get blindsided by the amazing appeal of ROI on these websites and just put their money in without really doing the necessary research. In that sense prepare yourself for a potential heartbreak, always remember to do your due diligence and your homework to alleviate some of these risks.
- Companies Have Trouble Finding Funding
What that means is there’s an underlying tone of less business savvy owners; less experience which indicates that they may have issues raising funding in the future. So you know research the track record for some of these companies.
- The Taxation Regulations
The taxation regulations of crowdfunding can be difficult for some, you know whether you’re investing through an entity or sole proprietorship crowdfunding is relatively new. We’re still trying to figure out the details unless you are up to date with these tax laws this can definitely slow you down.
- Due Diligence Process Is Not Extensive Enough
Last but not least if a company’s due diligence process is not extensive enough, like some of these newer companies that are popping up. It could cause for poor vetting which allows some of these deals to get through that aren’t quality. You won’t know they’re bad until you put your money in it and it goes down, which is pretty scary so it’s wrong again it all comes down to how much research you put in.
Overall crowdfunding real estate like any investment strategy, it’s essential for you to do your homework and research before putting any of your hard-earned cash into a deal. This means looking at the experience, the track wreck, and the track record of these real estate developers who are soliciting out funding money from you. Don’t be immediately fooled by the ROI or the returns. These sites are designed to flash it in front of you, so that you do put your money in. Don’t be distracted by anything, shiny objects, all the promises, and guarantees. You have to get down to the numbers, get down to the facts, get down to the details, and assess your risk. Remember there is no such thing as a sure thing especially in real estate so protect yourself.