The Traditional Real Estate Investor Path
Real estate has been the number one route to building wealth in the United States over the last two hundred years. According to the Collegeinvestor.com, about 90 percent of the world’s millionaires have been created by investing in real estate in the previous two centuries. For the average investor, real estate offers the best way to develop significant wealth. The real estate investment path has often been filled with several roadblocks for the regular working person. Real estate investing required that you have impeccable credit and the upfront cash for the downpayment and access to priced properties to make a profit. There are some inherent issues with this type of fix and flip strategy. You were taking a considerable risk of investing your money upfront, and you had to be a handy person, or your profits could be eaten up by hiring contractors. As a fix and flip investor, you were very limited to the number of properties you could invest. If one deal fell through, you lost, and you lost big!
Real Estate Crowdfunding
Real estate crowdfunding is a new and innovative use of Regulation Crowdfunding that allows non-accredited investors to invest in real estate deals on a FINRA and SEC certified portal. Real estate crowdfunding uses the crowdfunding model to raise funds for real estate deals all across the nation and locally at the same time. Through this type of real estate investing, investors can invest in a wide variety of properties without dealing with mortgage brokers, real estate agents, or contractors. The crowdfunding platform will take care of the day-to-day tasks to ensure successful completion. Thus, allowing you to gain the returns without all of the hassles of “fixing and flipping” homes on your own. We will explore six benefits in this blog post that make real estate crowdfunding an effective and efficient means of building a diversified real estate portfolio as a passive investor.
Active vs. Passive Real Estate Investing
Active investing is when an investor personally purchases a property for rental cash-flow or to fix and flip for a profit. The property could be anything from a single-family home to a sizeable multifamily property. Active investors are involved in every aspect of the deal from finding it, obtaining financing, personally guaranteeing the loan, and subsequently managing the investment. The process of identifying the correct market, property, financing, and closing the deal can be daunting, but it can also be advantageous. If it all goes well, an active investor reaps the lion’s share of the returns.
Passive investing is a hands-off approach that allows an investor to place their capital into real estate syndication — more specifically, an apartment, self-storage, or mobile home park syndication — that is managed in its entirety by a sponsor. Investing passively in private real estate means investors outsource the selection and management of investment properties to a sponsor. These sponsors pool funds from many investors to buy more extensive or an entire portfolio of properties, execute specific business plans, run day-to-day operations, and report back to investors.
Real Estate Crowdfunding Provides Portfolio Diversification
Diversification is the process of investing in different types of real estate assets, minimizing a portfolio’s overall risk by lessening the impact you’d see from a single asset loss. This is especially true when investing in real estate, where deals may outperform and underperform based on original projections. Diversification is more accessible with real estate crowdfunding than traditional real estate investing because of the low minimum investment per deal. It gives an investor access to pre-vetted deals that are plentiful on many platforms, and the low minimums let investors participate in various property types across many local markets.
An Innovative and New Investment Model
In the good ole days investing in real estate investing depended mostly on business connections and being in the right circles. It was all about who you know and how much money you had to invest in these secret deals. The Securities Act of 1933 made it impossible for non-accredited investors to invest in private securities. Since the contracts could not publicly be solicited, this was like a secret society of investors that was closed to the public. Real estate crowdfunding allows investors to pool money with others on a Regulation Crowdfunding platform to access deals they usually would never see. They can get in on bigger deals thanks to crowdfunded capital. Besides curating deals for investors, crowdfunding platforms offer as much detail about operating partners and properties. Although investors are starting with more information, they’re still encouraged to conduct their due diligence to make sure the investment is right for them.
Lower Minimum Investment Amounts
You needed $50,000 or $100,000 just to get in on the ground floor of a deal in the past. Because investors can now pool that amount of money using crowdfunding, a group of investors putting up as little as $100 can access these deals. In contrast, significant investors can still invest large amounts of capital. Issuers who need smaller amounts of money now have a new funding source that’s potentially faster and easier to close than a traditional bank loan. A group of fix and flippers using real estate crowdfunding now can create companies that can currently raise to $1,070,000 in any 365 days and buy an entire block and reduce their capital exposure and risk.
Real estate crowdfunding allows both novice and veteran investors to diversify portfolios across quality real estate investments. Real estate is an attractive alternative investment for several reasons. Investors can diversify across geographies, property types, and even operating partners. Issuers can also choose between debt and equity investments. Real estate crowdfunding also provides a path to wealth-building for regular working people with limited investment funds by allowing inclusive investing in real estate development projects that impact their neighborhoods. Real estate crowdfunding allows community-led economic development in these uncertain times. Crowdfunding is changing real estate investing for the better. Is it time for your portfolio to include crowdfunded real estate? For those of you interested in learning more on the subject, I’m holding a free webinar series on Real Estate Crowdfunding at http://crowd-max.com/