Crowdfunding for real estate investment? Here’s what you need to know.
Real estate investment is seeing the spread of retail investment and crowdfunding, which enables small-scale investors to participate in investment. This is opening up property investment to ordinary individual investors, who had relatively little access before. Below, we outline how these investment methods work, and their advantages and disadvantages.
The upsides and downsides of real estate retail investment products
The advantage of real estate retail investment products is that you can invest in property worth several million dollars for a small fraction of its price. People who do not have the economic wherewithal to buy a whole building can now invest in such a property by buying a single portion of ownership.
That said, given that the value of ownership portions for real estate retail investment products could be above $100,000, this is certainly not a small investment. There is also liquidity risk: with the scale of the secondary market for retail investment products smaller than that for actual real estate, you may not be able to find a buyer at the desired price when you want to sell.
What is crowdfunding?
Recently, crowdfunding has been a major driver behind the spread of real estate retail investment products. Crowdfunding is an online matchmaking service for people seeking and supplying funding.
The key point of real estate retail investment products is that they facilitate property ownership and management by amassing funds from multiple investors. There is a very close symbiotic relationship between real estate retail investment and crowdfunding because crowdfunding enables the merits of a particular investment project to be communicated to, and investment solicited from, large numbers of people via the Internet.
The most common type of real estate retail investment using crowdfunding is so-called “crowdfunding investment”, which generates a dividend or other financial reward in return for investment. In this type of investment, the funds amassed by recruiting small investors via the Internet are invested by a property investment professional. The profits generated by owning and managing the property are distributed among the individual investors.
The upsides and downsides of crowdfunding
Crowdfunding benefits individual investors by giving them easy entry into retail investing, enabling them even to make small-scale investment in expensive real estate, which was relatively inaccessible to them before. An added attraction is that retail investment via crowdfunding offers a higher return on investment than the interest on a regular bank account.
But there are some downsides too, chief among which is that your principal is not protected. As this is an investment, not a deposit, you run the risk that you will suffer a loss of principal. And there is also liquidity risk, as once you have invested it is hard to cash in your investment before it matures.
Property investment made accessible
We have examined the relationship between the growth in retail investment and crowdfunding. Real estate investment has now become accessible to retail investors, as they can participate with limited funds, but we must acknowledge the risks. You should weigh up the advantages and disadvantages carefully before plunging in.