For many investors, a portfolio consisting only of stocks and bonds isn’t diverse enough. Instead, some prefer to add other asset classes, including real estate.
If you don’t have a lot of cash, though, it can be difficult to buy property. You can invest in real estate investment trusts, or REITs, without a lot of capital, but what if you want to get involved in other types of projects?
One way to invest in real estate without the need for a big chunk of cash is to use a real estate crowdfunding website.
What is Real Estate Crowdfunding?
Basically, with real estate crowdfunding, you invest your money in a project or real estate portfolio, and you receive earnings in proportion to your stake. You might receive monthly or quarterly payments, and, in some cases, you get a payout when the property is sold.
With real estate crowdfunding, you have an opportunity to pool your money with other investors to get a piece of projects that you wouldn’t be able to fund on your own. There are two main types of real estate crowdfunding to choose from:
Equity crowdfunding. You actually get a share of the property or portfolio in question. Not only do you receive payments from rents, but you also get a share of the profits if a property gets sold. In some cases, you can actually choose specific projects or developments to invest in, and you own a piece of it.
Debt crowdfunding. This is mostly about receiving income as a result of mortgage payments. You have an interest in the portfolio, but if the property is sold, you don’t have a share of the profits because you’re investing in the debt, and not the actual property.
Depending on the platform you choose, you can get started with as little as $500, although some platforms require more. Even if you have to make an investment of $10,000 or more, though, in many cases it’s still more doable for some investors than coming up with hundreds of thousands of dollars to buy a development directly.
Finally, some real estate crowdfunding platforms only allow accredited investors to participate. These investors are those who have a net worth of at least $1 million (excluding your home’s value) or an income of at least $200,000 ($300,000 if married) a year for the last two years.
Platforms that accept both accredited and nonaccredited investors might only offer certain types of projects or portfolios to accredited investors, so you might not have access to the full range of possibilities if you’re nonaccredited.
Before you join a platform, make sure you can meet the minimum and that you meet any accreditation standards.
Downsides to Real Estate Crowdfunding
While real estate crowdfunding can be a good way to diversify into real estate without the need for a lot of capital, it’s important to understand the risks involved. Before you move forward, make sure that you understand the potential downsides:
— Loss of capital. As with any investment, you run the risk of losing your capital.
— Vetting issues. Some platforms rigorously vet the projects they offer, while others don’t. If you’re not careful, it’s easy to lose money due to poor vetting.
— Liquidity problems. With equity real estate crowdfunding, your money might be tied up in certain projects for a set period of time, so you can’t just exit the investment on short notice.
— Lack of transparency. In some cases, you might not be clear about how a deal is structured, or you might not fully understand everything having to do with the situation. Because of how new real estate crowdfunding is, it’s also hard to see historical returns and get a feel for the potential results.
It’s important to be careful before using real estate crowdfunding. You need to have a clear idea of where real estate fits into your portfolio, and you need to be prepared to lose the money you put in. Additionally, depending on the platform and the investment, you have to realize your money could be locked up from six months to 10 years.
The Bottom Line
Real estate crowdfunding can be a great tool for someone who wants exposure to real estate but doesn’t have a lot of cash available to make a big purchase.
When looking for the right crowdfunding platform for you, consider whether you prefer equity or debt crowdfunding. Realize, though, that many equity crowdfunding platforms are only open to accredited investors. As a nonaccredited investor, you might have little choice other than to use debt crowdfunding. Even so, it’s possible to see solid returns if you’re interested in diversifying into debt investing.
Figure out what is likely to help you meet your portfolio and income goals and go from there, with the understanding that many experts recommend that you limit your real estate exposure to between 10 and 20 percent of your portfolio.
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How Crowdfunding Could Help You Invest in Property originally appeared on usnews.com