The Basics of Real Estate Crowdfunding

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Crowdfunding is huge right now, with estimates placing crowdfunding totals to reach nearly $1.3 billion by the time 2027 rolls around. Crowdfunding has an important place in the real estate market, with many entrepreneurs hoping to use crowdfunding to grow their real estate ventures. 

Here’s how you get started with our real estate crowdfunding beginners guide…

What to Know

First of all, keep in mind that crowdfunding platforms are each structured differently. How they work determines what you own as an investor. You may need to create a new, separate company for your crowdfunding purposes, like an LLC. This is the entity that owns the real estate interest, with all investors holding shares in the LLC

How to Raise Funding

You have two choices for raising funds for your real estate ventures via crowdfunding. You can either use property equity investment, and earn income from real estate purchases, or you can use a loan investment that is property backed so that you are loaning out funds to the developer. 

Diving in a bit deeper to these two options, equity investments turn investors into shareholders. Any returns you receive are determined by how much rental income the property produces. 

Debt investments are advantageous because you receive a fixed return amount for your investment, as well as the income from the mortgage loan interest rate. Payments tend to come in monthly or quarterly. However, your returns are limited with this method. 

What Kind of Regulation Is There for Crowdfunding?

You may be concerned about how crowdfunding is regulated, and the good news is that the regulations changed in 2012 with JOBS, which stands for Jumpstart Our Business Startups Act (more details). This change makes it easier for investors to advertise straight to their audience in a variety of ways. They can use social media, direct messaging, and more. That lets real estate investors get in touch with more people who might fund their ventures. 

How to Keep Yourself Safe

We have a few tips to help protect yourself as you attempt to start a real estate business through crowdfunding. 

  1. Pay attention to your risk and keep an eye out for potential problems. Weigh the advantages and disadvantages of any real estate purchase you have in mind as well as the two different kinds of crowdfunding. 
  2. Know for sure how long the crowdfunding method will lock you into real estate deals. The liquidity schedule is really important and helps to determine when you will be able to make all the profit on your own. Consider how quickly you might be able to sell the property. 
  3. The platform you use for real estate crowdfunding is not operated by investment advisors. Be careful about the kind of advice you receive from them, though you don’t necessarily want to completely disregard their opinions. Consider getting advice from a financial advisor before you finalize a deal. 

This is just a little information to get you started, and we hope it helps you begin to grow your real estate portfolio through means of crowdfunding. For more information, check out this real estate crowdfunding usa guide.

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