What is Crowdfunding and How it can alleviate Real Estate risk ?

General Real Estate Investing
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Crowdfunding:
Crowdfunding is a practice of funding a project or venture by raising small amounts of money from a large number of people.
A group of people/investors investing on a particular idea or property or shares.
Crowdfunding makes use of the easy accessibility of vast networks of people through Social media and crowdfunding websites to bring investors and entrepreneurs together.

No one denies the Fact that, the Real estate investing is one of the best ways to make money and build wealth. There are many benefits to buying and owning properties. Though owning a rental property is a relatively safe investment, not everyone can succeed in this competitive market.

let us note, the risks involved in real estate investing,

  1. Unpredictable Market.

  2. Highly Location Dependent.

  3. High Initial Capital.

  4. low liquidity.

  5. Depreciation.

  6. Vacancy Risks.

Now, Let’s see the Benefits of Crowdfunding in Real Estate and how the risks noted above can the minimized,

  1. Diversification of Portfolio:

With the help of Crowdfunding, one can diversify his property investments just like stocks even with low capital. By this, the risks involved in market and location of properties can be minimized.

  1. Short-term and Long-term investments:

Crowdfunding platforms provide flexibility with the investment period, one can invest in a property based upon his interests. i.e. Either Short term or Long term.

  1. No more lack of liquidity:

Crowdfunding platforms usually allow investors to buy and sell properties with ease on their platform. Theoretically, it is easy to sell a small portion of the property rather than the entire property.

  1. Low capital:

Most of the Crowdfunding platforms allow the investors with very low minimum investments, which helps to minimize the risk of high capital investment.

  1. Transparency

The key advantage that the real estate crowdfunding platforms provide over the other different kinds of real estate investments is ‘transparency’. Investors may have a finite information about the unrevealed access.

  1. Tax Benefits

An investment property always comes with certain benefits, including the ability to duck down the depreciation and other property maintenance expenses. It won’t be possible with REIT to take advantage of tax breaks. The way in which crowdfunded investments are structured, on the other hand, grants investors the rewards without actually owning the property.

Conclusion:

Every Investment Option has its own risk factors, one has to choose accordingly. The Best Investment Option would be, the one with minimum Risks and High Returns.

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Have you tried to use crowdfunding for real estate investing?

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Wow Vinay,

             Hopefully I can help you avoid time in prison!!!

Crowd funding is always a securities offering if there is over 10 investors! Federal law only allows up to 10 investors as fractional partners in a note (Trust Deed) or an investment partnership IE: LLC, Corporation, LLP, Etc.

Crowd funding over 10 people is a securities offering which involves a securities registration with the SEC (Federal Securities Exchange Commission) and usually involves Accredited Investors! It is known as a REG D 504, 505, 506b or 506c private placement offering.

Capital can be raised as debt offering which has a fixed term, is not liquid or sellable / tradable immediately and can not be sold on the open market for some time period. A debt offering does not share in any tax benefits.

Capital raised as an equity capital offering has a fixed term, is not liquid or sellable / tradable immediately and can not be sold on the open market for some time period. A equity offering may offer tax benefits beyond the need for a ownership tax return and payment of a entity tax burden before distribution to individual investors.

An investor can only diversify his investments through crowd funding if he is an accredited investor and meets that minimum standard set by the SEC (Federal Government)!

Each investment has it’s own specific term so although short or long term investments are offered the term of the investment is fixed!

There is a huge lack of liquidity, as the promoter your obligated to manage the property for it’s specific term and as an investor the cash from this investment will not be available for the investment term!!!

The minimum investment is set in the offer, it is generally non negotiable and must meet the registrations minimum investment requirements as it was filed with the SEC.

Disclosure (Transparency) is specific to the type of offering 504, 505, 506b or 506c as required by the SEC.

Conclusion, be smart, check state and federal regulations. Make sure you know the type of offering debt or equity and you know the type of offer and how it’s structured.

REG D 504 private placement offers are up to $1,000,000 dollars!
REG D 505 private placement offers are up to $5,000,000 dollars but limited to a maximum of 35 sophisticated but non accredited investors and the balance of investors must be accredited!
REG D 506b private placement offers are up to unlimited dollars but all investors must be known to the promoter or road show conditions to investor groups must be known for over 30 days before investing and all investors must meet federal accredited investor standards. No advertising!
REG D 506c private placement offers are up to unlimited dollars, tombstone advertising is allowed in print or radio / TV add but must be general in nature and must advise as to “Accredited Investors Only” and must have a disclaimer!

             GR
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Crowdfunding is a process of raising small amounts of funds from a group of large number of people :bobble.
This is usually done to support a common interest.

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Crowdfunding websites such as Kickstarter and Indiegogo attract hundreds of thousands of people hoping to invest in the next big thing. As of 2019, crowdfunding is mostly synonymous with Kickstarter, as it is the biggest crowdfunding platform there is: since Kickstarter’s founding in 2009, more than 160,000 projects have been successfully funded on the crowdfunding site, with more than $4.2 billion dollars pledged across all Kickstarter projects.

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Vinay Reddy, I agree with almost all of your arguments for and against property crowdfunding. But there are some moments that I want to highlight.

First, you wrote that this approach requires High Initial Capital. But that’s not true for all platforms, as far as I know. For example, such platforms as EstateGuru and RealtyBundles requires only 50 euros per investment. I don’t think that is a very high initial capital.

Second, you wrote that everything depends on the location. And I agree with you. But that is why some (not all, of course) crowdfunding platforms offer assets in different locations and reduce risks in this way. I worked with RealtyBundles and they offered assets even in different countries.

What I want to say, the conditions differ one platform to another. It is better not to make general research, but explore each platform in the highest detail level.

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Hi there!

Thank you for the info about traditional real estate and crowdfunding. I also like crowdfunding more. It`s modern, easy and gives me more room to choose many projects at once, so I don’t have to focus only on one asset. I found several articles on the internet recently which goes into crowdfunding even deeper and makes great comparisons with traditional real estate. What about others? Which model do you prefer?

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With the introduction of the JOBS Act in 2012, crowdfunding became a way of raising more capital for investments and has become increasingly popular throughout the past few years. Crowdfunding refers to the practice of raising money from a large group of investors through an online portal. Crowdfunding sites mostly raise money to help fund the purchase of assets in advance. This new method of investing is operational but impractical as a standalone equity raising solution for most LPs as they underestimate the time and effort it takes to attract crowds.

Financial analysts and investors alike believe crowdfunding has the potential to revolutionize the way investments are marketed and made. On crowdfunding sites, offerings are now available for review online, making comparing fees and investment structures easier than ever. Online reviewing allows crowdfunding to increase transparency for investment deals, alleviating the risk of the unknown. Crowdfunding also requires less capital for real estate investing than other methods, allowing beginner investors to diversify their portfolio without having to place too much capital into real estate.