What is Real Estate Crowdfunding?

Key Takeaways

• Compare each crowdfunding opportunity based on its underlying property, financing structure, fees, projected returns, and risks rather than relying on the platform’s headline numbers.
• Decide whether equity or debt crowdfunding better fits your investment goals because the two structures can differ substantially in how returns, losses, and repayment work.
• Treat liquidity as a major consideration and only commit capital you may be able to leave invested for the expected holding period.
• If you already own Durham rental property, compare the potential benefits of crowdfunding with the control and responsibilities that come with direct ownership.
• Review your overall portfolio before investing so a crowdfunding position complements rather than concentrates your existing real estate exposure.

Real estate has long been recognized as a niche that requires a big investment. To invest in an apartment building, office space, shopping mall, or other asset, you need adequate funds, due diligence, financial support, and the ability to manage your investment.

Then came real estate crowdfunding. This is a concept that may help you invest in real estate more easily. However, being accessible should not be confused with being easy or safe. In fact, you may face hazards, liquidity may be limited, and even fees are not guaranteed.

Thus, it is very important to know how it works before integrating it into your investment strategy. And you can learn about that and more with Mark Thomas Properties PM.

What is Real Estate Crowdfunding?

Real estate crowdfunding is a way to raise money for a real estate development project from several investors, often through a website. Typically, an individual investor would not contribute the total amount needed for a project in Durham. Instead, a group of investors can combine their contributions to pay for the project.

For instance, suppose a company identifies a property that it plans to buy or construct. Instead of relying on its own finances or borrowing the money from a financial institution, it can raise capital from individual investors via a crowdfunding marketing offer.

Depending on the structure of the actual real estate crowdfunding offer, you can be an equity investor or a debt investor. Equity means that you have ownership and a share in the profits or success of the real estate deal.

You become a debt investor when you provide the capital to the company and expect payment of the loan amount according to certain terms. This difference is crucial because equity and debt investments have different risk and return profiles.

How Does Real Estate Crowdfunding Work?

In general, a sponsor, or real estate company, identifies a project in need of capital. After identifying the project, the sponsor prepares investment opportunity information that could include the property location, purchase price, business plan, financing, holding time, projected returns, associated risks, etc.

At that point, the opportunity could be presented to potential investors via a crowdfunding platform. Potential investors may need to meet certain criteria, depending on the offering, after which the investment is made based on the offering document.

Once the capital has been raised, the sponsor will use it toward the intended purpose, such as purchasing, developing, renovating, or refinancing the real estate. Investors might then receive cash flow through rental income, interest income, refinancing, or disposition of the property. The method may differ significantly by offering.

Equity Versus Debt

One of the key aspects in real estate crowdfunding is whether one invests in equity or debt.

Equity Investing

An equity investment generally gives investors a stake in a property, or an entity that owns property interests. Returns can be derived through rental income, profit earned, appreciation, refinancing, or outright sale of the property. The advantage can be appealing, since investors can benefit from appreciation.

But there is a significant amount of risk in equity investing. If the performance of the property is not strong, it is possible that returns might decrease or disappear completely. Equity investments may also mean that the investor must endure waiting before the property eventually sells or is realized.

Debt Investing

Debt crowdfunding, on the other hand, is all about lending money through internet platforms to a borrower/real estate project. An investor typically expects interest payments along with repayment of their initial capital.

Even though debt investments have a better structure of returns compared to equity investments, it does not eliminate their risks. If things go awry with the project, the borrower may not be able to repay the loan. Understanding the place of an investment in the overall capital structure is of utmost importance.

Why Has Real Estate Crowdfunding Gained Momentum?

One of the factors is accessibility. Often, conventional real estate investment requires a huge amount of money and immense involvement on the investor’s side. Crowdfunding may open the door for investors to become involved in bigger properties or projects without necessarily buying the whole asset themselves.

It could also help gain diversification. Some investors may possess sufficient budget and spread the capital across various properties, geographical areas, types of property, or investments instead of putting all in one building.

Crowdfunding may also interest investors willing to get exposure to North Carolina real estate without being directly involved in finding residents or managing contractors. The platform or sponsor typically deals with the operational aspect of such investments. Convenience is one of the biggest benefits.

Crowdfunding Cannot Help Reduce Market Risk

It is worthwhile to note, though, that indirect ownership should not be confused with lower risk. Indirect ownership in the case of crowdfunding is still subject to the performance of the underlying property. Property values could decrease. Rental activity could drop. Construction could face delays. Interest rates could affect financing costs. Costs of operations could rise.

Besides, economic conditions would also impact commercial property, housing prices, development activity, and the provision of finance. The fact that an investment is offered via a sophisticated digital platform does not minimize risks. Investors should assess the property and the business plan and not concentrate solely on projected returns.

Liquidity is a Key Factor to Consider

Typically, traded investments can be easily sold. Private real estate crowdfunding investments differ from the above. An investor may be unable to sell when they need to. Usually, some offerings are not short-term investments, and secondary liquidity may be scarce or not exist at all.

This risk of illiquidity can grow quite large. Before investing, you should think about the possibility of needing emergency funds, large purchases, retirement expenses, or other obligations. The funds committed to an illiquid investment should essentially be funds the investor can afford to tie up for the anticipated holding period.

Bottom Line

Real estate crowdfunding is revolutionizing how some investors can engage in property investments. Rather than buying a whole building or managing a rental property directly, an investor can put their capital into a bigger real estate project together with other investors.

Doing so can provide convenience, diversification options, and opportunities for investments that might otherwise require a larger amount of capital. Get the insight you need by hiring Mark Thomas Properties PM.

Frequently Asked Questions About Real Estate Crowdfunding

What Fees Should Investors Look For In Real Estate Crowdfunding?

Fees can vary significantly between crowdfunding platforms and individual offerings, so investors should review the offering documents carefully rather than comparing projected returns alone. Potential costs may include platform fees, asset-management fees, acquisition or disposition fees, servicing fees, or other expenses associated with the investment structure.

How Should I Evaluate A Real Estate Crowdfunding Opportunity?

Start with the underlying real estate rather than the advertised return. Review the property, location, purchase price or development budget, financing, projected operating expenses, investment structure, sponsor experience, anticipated holding period, exit strategy, and major assumptions behind the projections.

What Are The Legal Considerations For Real Estate Crowdfunding?

Real estate crowdfunding can involve the offering and sale of securities, so the legal and regulatory requirements depend on how a particular offering is structured.

Under Regulation Crowdfunding, for example, offerings must generally be conducted through an SEC-registered intermediary, and investors receive required disclosures before investing. Securities purchased through a Regulation Crowdfunding offering generally cannot be resold for one year.

Does Real Estate Crowdfunding Make Property Investing Easier For Durham Investors?

Crowdfunding can reduce some of the responsibilities associated with directly owning a rental property because investors generally are not responsible for day-to-day leasing, maintenance, or resident communication for the underlying asset.

That does not mean the investment requires no due diligence. A Durham investor still needs to evaluate the offering, financial assumptions, risks, fees, and investment timeline.

Can A Property Management Company Help If I Choose Direct Ownership Instead?

Yes. If you decide that directly owning rental property better fits your investment strategy, professional property management can take much of the day-to-day operational work off your plate.
Mark Thomas Properties offers full-service management that includes property marketing, tenant screening and rent collection, maintenance coordination, inspections, and assistance with the eviction process.