People who want to dabble in real estate investing but who don’t have the deep pockets of the ultra-rich are turning to real estate investment crowdfunding to make their dreams a reality.
It works like this: Various online crowdfunding platforms connect real estate developers—who may be struggling to raise funds through more traditional means—with investors who want a more straightforward, less risky way to invest in real estate. Crowdfunding for real estate is often a win-win. And it’s a practice that is growing among both developers and investors. But that doesn’t mean it comes without challenges.
The risks versus the benefits of crowdfunding
“It has all the risks of investment,” said Marshall Saunders, a partner at a real estate investment firm and an instrumental figure in getting the appropriate laws passed to allow crowdfunded real estate investments. “This property could not make money; it could lower in value—any number of things. Just like buying a home or buying an apartment building, all the risks of that come with this investment.”
For people like Saunders, however, the benefits of crowdfunded real estate often outweigh the risks.
“We all accepted it as a truth that neighborhoods that are more owner-occupied are better neighborhoods,” Saunders said. “They have lower crime rates and more local oversight. More of the local population frequents local businesses. Neighborhoods that are non-owner occupied tend to be lower income, tougher neighborhoods because of it.”
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When real estate investors buy property in neighborhoods they don’t live in, this can have an adverse effect on the neighborhood. But crowdfunded investment gives an opportunity for more locals to invest in their own area—ultimately raising the property value in the area.
“When you take a group of owners who live in that neighborhood—or even 20 minutes nearby—instead of one owner who is out of town, you have 30 owners in town. You have 30 owners driving by who have a vested interest in that building. Now, when that building produces a profit, all of those profits go into a bank account of people who live local.”
Saunders described it as a “self-fertilizing investment.”
“You have renters who are in the area, they pay money, the profits go to owners who are in the area, and then they are more likely to spend their money at local coffee shops, diners, and supermarkets. There’s more money in the area, and the rental rates go up because it becomes a more substantial community of wealth and income,” Saunders said.
Finding trustworthy resources for crowdfunding opportunities
One of the challenges with crowdfunding real estate investing is knowing who to trust. That’s why when Ian Ippolito got into the scene after looking for places to invest wealth he acquired from selling a business, he ended up creating the Real Estate Crowdfunding Review.
“The biggest problem is that it’s not like a stock or a mutual fund that you can look up on something like Morning Star,” said Ippolito. “You are looking at each investment and it takes quite a bit of time.”
So Ippolito created a website to review and aggregate different opportunities. He also uses the site to educate future investors on the barriers to succeeding in the space.
“If you don’t already have a real estate background, you’ll find that investing in real estate crowdfunding requires a lot of background education,” he writes on his site. For real estate agents—educating your clients and potential investors is one way you can assert your value in this emerging space.
“There are too many platforms,” he said, talking about the variety of options out there. “There’s more than 100. I don’t think all 100 are going to survive. That’s just too many.”
Despite that, Ippolito sees crowdfunded real estate as an opportunity.
“In the last year and a half or so, it has finally allowed in nonaccredited investors,” he said. “Before that, you had to have pretty big assets. Within the last year and a half, it’s opened the market to almost anybody.
Ippolito is confident that others will see the advantages of getting more people involved in crowdfunded real estate investing.
“It allows people to pool together their money to access an investment that they wouldn’t be able to otherwise. I think that’s the biggest pro.”
Real estate investment crowdfunding is poised to change how your real estate development clients fund their projects. Make sure you are in the know when it comes to this new way of gaining capital.