There are two ways in which you can invest in real estate: one in the traditional way and two in a 21stcentury way.
There are several options that are emerging in the real estate market and if you are a potential investor then it is prudent that you know about these options and their pros and cons to make a careful and educated decision.
If you want to invest in real estate in the oldfashioned way and earn money from it there are different ways you can do it such as:
- You can simply buy a property with cash or even a loan and then collect the income from it in the form of rent.
- You can also earn from it if you want to sell it off after making the necessary repairs to increase its value and get a large amount of money at a time.
- Alternatively, you can also invest in a real estate investment trust. This is a specific type of entity or fund that buys different residential, commercial or industrial properties.
On the other hand, if you want to do it in the 21stcentury way you can do it with a real estate crowdfunding company. The working process of these companies is pretty simple.
- This type of company will pool in a large amount of money from different investors.
- They will then use this fund to make loans to different borrowers for buying residential and commercial properties or to home flippers.
- In the process, the company earns rent or interest on such deals and this money earned is passed on to the investors that supplied money to them.
This process is an effective and less risky alternative to direct lending of money to any individual or a small firm and is growing in popularity. This is due to several reasons such as:
- The crowdfunding site does most of the lending and procuring work
- Check out the credit of the borrower
- Judge the inherent risk in making a particular loan
- Collecting the money and even
- Chasing the borrower for payments in case of default.
However, it is much different from a REIT or Nationaldebtreliefprograms.com wherein most of the decisions are vested on the fund manager. In crowdfunding, it is you who will decide what type of loan or properties are to be included in your specific portfolio.
Prospects of crowdfunding
According to the industry insiders, investors can earn annual returns as much as 8 to 12% in such type of real estate investment but critics typically warn about the high risks involved in it. One such common is that there may be a few crowdfunding companies that may cut corners in their ascent to gain more market share.
However, there is no doubt that this platform offers a large number of opportunities and a considerably high projected return provided everything goes as desired and planned. There are a few things that you should know about this platform to start with.
- The crowdfunding industry started in 2013 and mushroomed after the regulations in the federal JOBS act were relaxed.
- The new rules issued and implemented by the Securities and Exchange Commission around a year ago encouraged the investors to enter in this market even with just a few thousand dollars.
There are ideally two primary categories in which investments can be made. The first one is the equity investments in which the company owns the properties and passes the capital gains from the sale of a property and rental incomes to the investors. The other is the debt investments wherein fund is offered to the property owners and passed on the interest payments of the borrowers.
Features of crowd funding
Previously, most of the platforms are limited to accredited investors. These are the investors who typically have at least:
- $1 million as liquid assets or
- $200,000 as their annual income.
However, the rules are changing pretty fast and therefore if you do not qualify now keep an eye on it as you can do so very soon when the non-accredited investors will also be allowed. The good news is there are a few specific platforms that have already started entertaining the non-accredited investors.
Another significant aspect of this platform is that it provides enough opportunity for retail investors as well who were neglected until now. They can now own an income stream by owning a portfolio of properties.
A word of caution
However, there are a few things that one should care and consider to avoid the risks involved in crowd funding and making money.
- Anyone who wants to make equity transactions in any large commercial real estate must have patience.
- Moreover, the platform offers a significantly high rate of returns due to the fix and flip financing models though there is a fair bit of risk in it as the rate of return largely depends on the ability of the investor or the developer of the property to make it reasonably and profitably rehabilitative.
- It means, even if the doors are wide ajar, this platform may not be the deal playground for everyone. This is because real estate is a well-diversified portfolio and all investors need to diversify actively to readily and ably invest in alternative assets.
- Typically real estate has always been a very stable asset class even during and especially after the economic downturn a decade back. But this fact does not take away the need to make proper plans for investing in equity projects.
- Debt investments have the potential to pay back the returns soon but an investor should be highly committed to the equity investments especially for a period of three to five years to enjoy the benefits that this platform has to offer.
Last but not least, this platform does not have a very long and proven track record to jump into it. This is not because it is not productive but it is due to the fact that this is a new industry. Therefore, experts warn that people may tend to overlook due diligence being eager to grow.