By now you’ve probably heard about real estate crowdfunding and how it’s a great way to dip your toes into real estate without forking over a lot of money.
In fact, many real estate crowdfunding companies claim that you can invest into a property for as little as $5000. Not only do you get to choose the exact property you want to invest in, but many of these properties are backed by some of the biggest names in the real estate sector, such as Silverstein Properties, a developer for the World Trade Center.
What makes this even more juicier is that you don’t necessarily have to be an expert in real estate, and you get the chance to enter into real estate markets that aren’t in your vicinity.
But is the hype all that it seems?
Yes it can be. In fact, crowdfunding is potentially disrupting the real estate investing scene by leveling the playing field for investors.
Treating Investors Fairly
One company, Fundrise, aims to treat investors more fairly by giving them access to real estate deals that they otherwise wouldn’t have known about. CEO and co-founder of Fundrise Ben Miller noticed that when he was building a project in Washington, D.C., traditional sources of capital didn’t really want to invest because they didn’t understand the project.
What he did instead was raise money for this deal on the internet, the first to do so.
“Since starting Fundrise, I’ve become much more acutely aware of how unfairly investors are treated today,” Miller says. “Between high fees and poor access to top investments, it’s become harder and harder to find yield and diversification, not to mention a way to invest in real estate at all.”
Crowdfunding companies like his aim to help give access to deals to accredited investors, not necessarily people who have been in the real estate sector. One investor, Dr. Kenyon Meadows, a doctor at SE Georgia Cancer Care Center, knew it would have been difficult for him to develop relationships in the different markets he has invested in through crowdfunding.
So far, he has invested at least $250,000 into 20 real estate crowdfunding deals. One property he had invested $10,000 in with a projected 9% ROI, and was paid back monthly until the property sold a year later.
Fundrise hopes to continue to help investors like Meadows generate wealth. “We’re having a lot of fun placing the building blocks on which this entirely new approach to finance will sit,” Miller says.
As we grow, I hope we can keep this mentality and stay true to our roots and our goal of giving everyone access to online, low-cost, high-quality investments.”
Everything Comes With a Risk
Since this industry started in 2012, there has been a lot of growth. Many companies are now vying for investor money, and it is predicted that 2016 will be a huge year for real estate crowdfunding.
However, just because investors can get access to real estate deals they wouldn’t have known otherwise, doesn’t mean they should go with any company.
“My biggest concern right now is around the quality of deals being done by other platforms in the space. I am seeing other companies do bad deals, bad prices, bad terms.
They’re going to blow up. And when they blow up and they will lose people’s money. A few investments are good and some are decent, but many of them are poor. And when they go south, it will likely be bad for the industry as a whole” Miller says.
Lesson here? Real estate crowdfunding carries its own set of risks, just like any other type of investment. Just because you can stand to gain a lot from it, doesn’t mean you should invest blindly.
How You Can Get Started
Like any sort of investment, you need to do your due diligence. Just because you don’t need to know a lot about real estate or the area where you are investing, doesn’t mean you don’t need to have any knowledge at all.
Before looking at any deals, start with researching the real estate crowdfunding company you want to go through.
Ask questions like:
- What fees do I have to pay?
- Do they seem to know a lot about the real estate market?
- How extensive is their due diligence process?
Once you’ve decided on a company and zeroed in on a property you might want to invest in, read everything, including the fine print very carefully.
Ask questions like:
- What is the risk/return profile, and how much am I willing to risk.?
- What is the sponsor’s (the person or company arranging the real estate deal) track record?
- What happens if the project doesn’t go according to plan?
The more you research, the more you can best make an educated decision on what you want to invest in.
More and more investors will continue to help expand the real estate crowdfunding platform. Is this the right one for you?