Crowdfunding and Real Estate: The Perfect Match

Equity crowdfunding is booming. Ever since the passing of the JOBS act in 2012, the crowdfunding industry has been experiencing exponential growth. It doesn’t show any signs of slowing down anytime soon, either. Regulations continue to get less stringent, making it easier for companies to raise capital. Awareness of crowdfunding continues to grow as well.

Real estate has been experiencing a similar trend in recent years. Real estate has been showing strong recovery after the recent housing crisis. Returns have been strong for real estate investors, and many have learned from their mistakes that were made during the housing bubble.

Two sides to every coin

As with any investment, there are also risks to consider. Crowdfunding and real estate both come with their own set of risks, and it’s important to understand what these are.

With equity crowdfunding, you are typically investing in a private company during their seed or series A rounds. The company is still in its infancy, trying to prove itself and validate that there is a market for their product. Many startups fail, including many companies that had strong backing from investors.

It can also be difficult to do your own due diligence when crowdfunding. Private companies aren’t held to the same reporting requirements as public companies. Also, these early stage startups don’t have long track records to show. Often times, you are investing in the founders of the company and their vision.

Related: Crowdfunding: The Future of Investing

Real estate comes with its own problems, too. One major problem with real estate is the amount of capital required for each investment. Large down payments, closing costs, repair costs, and other expenses make it difficult for many investors to scale their real estate portfolio.

This also makes it difficult to.diversify amongst multiple properties. Owning only one real estate investment is risky. Investors want to try to spread their risk across multiple properties as quickly as possible. It can take years for some investors to save enough money to be able to get to this point.

The Perfect Pair

When you combine crowdfunding and real estate, though, many of these problems are resolved. Real estate crowdfunding is safer than investing in a private company. Real estate provides much more control and is much easier to value as an investor. It also provides collateral for the investor in case things turn south.

Real estate crowdfunding makes it much easier to do your due diligence as well. You are now able to evaluate the financials of the properties and determine the validity of the investment. The experience of the founders is still important, but now you have more information to base your decision on.

Crowdfunding also resolves the problem of needing large amounts of capital to invest in real estate. With crowdfunding, you can get started with as little as $1,000 for some investments. All of the other costs involved in a real estate investment are handled by the crowdfunding company.

Investors are now able to diversify across multiple properties very easily. Some crowdfunding projects invest in multiple properties in one offering, so technically you can diversify with only $1,000 invested. No more worrying about having all of your funds tied up in one property.

There are other risks involved with each investment that I didn’t cover in this article. Real estate crowdfunding is not flawless, and you still have the potential to lose money. The point I want to make is that crowdfunding and real estate compliment each other well by covering up some of each other’s weaknesses. Separately, both are good investments. Together, they become even better.