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What Is Real Estate Crowdfunding and How to Start Investing Today

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Published on Wednesday, September 14, 2016 by Land Century

Crowdfunding has changed the way people invest. If people want to back a product, they can provide money to help the maker see their dreams come true. And if a person wants to help someone pay their medical bills, this can also be done on crowdfunding websites.

But what in the world is real estate crowdfunding?

This is a new trend that is just starting to gain traction, and it makes a lot of sense. People want to invest in real estate, but a lot of people think that this is a pipe dream that can never come to fruition. After all, investing in anything but raw land is a big commitment and investment.

This is where real estate crowdfunding changes the very nature of the way that we invest as a whole.

Why Use Real Estate Crowdfunding?

Data from 2001 shows that the real estate market provided a 10.75% return, outpacing the S&P500 which boasted an annual return of 5.00%. Crowdfunding allows small investors to invest in properties they would otherwise not be able to invest in using traditional means.

But there are a few things you need to worry about, too:

* Investment Minimums: You can’t just take $5 and make an investment – it doesn’t make sense for anyone. Instead, many platforms will require $5,000 or more to be able to invest in a property. In short, you’ll still need a rather lofty sum of money to get started.

* Investor Fees: There may be fees required on your investment. These fees are normally in the 2% range, but they will cut into your overall returns. Based off of the figure above, you would earn 8.75% returns annually rather than 10.75% in this case.

Think apartment complexes, commercial building and the like when it comes to real estate crowdfunding. You need to be investing in something big for it to be crowdfunded properly, and this can be just a portion of a project. Some builders or developers may run out of capital because of unforeseen costs, so they’ll go to crowdfunding to complete the project.

This all cumulates into an amazing investment opportunity for investors, but there is even something better being offered.

Due Diligence

RealtyShares, one of the main crowdfunding platforms, does all of the due diligence for you. Professionals actually go through each and every project and sift through the submissions in a prequalification process. Only 50% of projects make it through this stage.

Detailed underwriting will take place to understand the feasibility of the project, which results in only 25% of projects making it to this stage. Finally, just 5% of the projects actually are listed on the platform for funding. All of this due diligence is hefty work on part of the crowdfunding company, but it is a safeguard for you as an investor. While I highly recommend going through your own due diligence protocol, this will protect your investment for the most part to ensure that the real estate project is a sound one.

Numerous Investment Options

Real estate is like any other investment in that there are many options to choose from. You can invest in:

* Residential properties

* Commercial properties

* Debt

* Equity


You’re paying to fund a project through your investment, or you are helping a property stay afloat to be able to make a profit.

How Does Crowdfunding Real Estate Provide Returns?

Returns on your investment are tricky. What many people don’t understand is that the way in which they’ll actually make their returns. And this leads a person to ditching the idea of real estate crowdfunding altogether.

The issue thing is that each investment type is paid differently.

* Equity: Owning a piece of equity means you’ll be paid distributions on a quarterly basis.

* Debt: If you purchase debt, you’re like a lender that is paid monthly. These payouts will have an interest rate attached to them, too.

So, if you own equity in an apartment building, you may receive a quarterly payout based on the net income of the property. This can also be rental income from a commercial building. Keep in mind that the crowdfunding site will often take 1% of the money invested as a fee. This is an acceptable fee for the amount of time and money they put into the due diligence of each project offered.

How to Start Investing Today

If you want to delve into the world of real estate crowdfunding, there are countless options available to you. Investing is a personal choice, so please do your research on all of the companies below and the properties you intend to invest in before giving them your money.

The five most popular websites that offer crowdfunding for real estate are:

* Fundrise
* Prodigy Network
* iFunding
* RealtyMogul
* RealtyShares

All of these sites have a good reputation, but each of them does have their own investment threshold.

Getting started is easy, too.

Most outlets will require a simple registration to begin using their website. This will not contain too much information, and once registered, you’ll be able to start looking through the investment options available. When it does come time to make an investment, you’ll need to attach a bank account and get the ball rolling.

Investing is the easy part, but tracking the success of a project will be key to success. Tracking on each platform is different, so take your time to look at each platform and see what they offer in terms of tracking. You’ll also want to see what they offer in terms of a minimum investment.

Some sites, like iProdigy require a minimum investment of $20,000. So, keep this in mind when going to each site. Since they’re all free to get started, it doesn’t hurt to see what they’re offering and find out what the terms are for some of the better investments available.

At the end of the day, you’ll have less control over these investments than you would if you were the only owner, but a lot of the hard work is taken out of the equation for you, too.
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