Finding capital has always been a challenge for real estate developers. They’ve been limited to conservative financial institutions who they have a relationship with or people they know. Often financial institutions don’t want to bother with smaller projects, although they are necessary in so many ways. But now developers have equity crowdfunding. They can raise money online from a crowd of investors. A marriage of finance and technology has brought significant disruption to the financial world that is trickling down into real estate.
For investors, returns on crowdfunded investments can be attractive and can provide a good income without too much hard work. That’s probably why crowdfunding for real estate has been growing in popularity, both for first-time investors entering the market and for seasoned investors looking to diversify.
But all investments carry risks and rewards so, before you take the plunge, take a moment to consider the advantages and disadvantages of investing through crowdfunding and the risk it bears.
The good
- Try it out. Crowdfunding lets you stick your toe In the water. It provides an opportunity to invest where you previously couldn’t.
- Just a little money. You don’t have to be wealthy to start. Some investment requirements are small, letting you buy a fractional part of the project for as little as $500.
- Fewer headaches. By investing in a real estate crowdfunding platform, all you need to do is invest your money. There are none of the usual hassles that come with investing in real estate properties such as late-night plumbing emergency calls.
- Make a difference. You can choose to focus on projects that resonate with your personal beliefs and make an impact with your investment. Like the projects at Small Change, where we focus on transformation and impact.
- Diverse opportunities. Crowdfunding provides an opportunity for small and medium sized projects that many financial institutions might ignore, but that are good for our economy. This is something else that investors can feel good about. You’ll be able to invest in every real estate type.
- Protection. The SEC crowdfunding regulations are designed to both promote equity crowdfunding and to protect investors from defrauders.
The not so good.
- Failure. There’s no guarantee that the project you’re investing in will succeed. Be sure to read all of the fine print.
- Patience required. Real estate can take a long time to complete and a long time to gain value. The returns could be good, but you may not see them until the project is sold or refinanced.
- Under-performance. The value of the project, when it is refinanced or sold, could be less than anticipated and you’ll receive a lower than hoped for return.
- Fraud. The same things that make investing online easy, might also attract bad actors. Although the industry has not seen much fraud to date, be sure to do your due diligence and make sure the project is legit.
- Security. Online data is vulnerable to attacks by hackers. Be sure the platform you use is secure.
Just like all other investment, equity crowdfunding carries the potential for great rewards and accompanying risks. Failure of a project, online security concerns, returns that could fall or disappear and a long wait might dampen your appetite. But the potential for rewards is big – the opportunity to invest in the real estate market without much money and without the usual hassles, the potential for generous returns, a greater degree of personal satisfaction and the prospect of stimulating the economy.
At Small Change we believe the good outweighs the bad. See our projects here.
Image from Pikist, Royalty free