Crowdfunding is a relatively new method of investment, but it’s become an establishment in the last decade, growing from fledgling kickstarters to fund small business prototypes that any user might encounter on Twitter to a fully developed industry, complete with financial segments that serve real estate investors. Think of real estate crowdfunding as the real estate investment trust of the future, but with a lot more versatility and accessibility to the modern investor or business seeking funding. Real estate crowdfunding sites are more than just kick starters for pipe dreams: they are a functional platform outside of traditional accredited investing. This means that more businesses are able to secure funding that might traditionally be overlooked by the conventional pipeline. And for investors, it means that one can invest with a smaller sum and make passive income without being tied to traditional investment vehicles. As the team sees it at LCI Realty, every real estate opportunity is worth researching, whether you are an investor or a business owner looking for funding. Here is a brief overview of real estate crowdfunding for both investors and borrowers. As always, if you want to look seriously at this opportunity and you need some expert advice, you can always contact the LCI team.
What Is Real Estate Crowdfunding?
Real estate crowdfunding can be complex in its execution at times, but if you have a basic understanding of crowdfunding, you get the basic concept of real estate crowdfunding. Basically, digital spaces exist that connect non-traditional and small time investors with businesses that need funding, expediting the process through the web. Websites and digital platforms are set up where borrowers are allowed to submit their business ideas and apply for funding. Because many real estate crowdfunding platforms are venture capital backed, there can be an extensive approval process, but there are some that are fairly open to most business concise business concepts. From an investor standpoint, you can access one of these platforms, peruse the curated business opportunities and choose how to disperse your capital to crowdfund certain businesses. In the same manner that certain businesses will choose equity lending over debt lending, some crowdfunding platforms are more focused on debt lending while others are interested in equity. Basically, this technology takes the real estate industry and makes it digital, removing some of the more conventional red tape.
Why It’s Good For Investors?
Traditionally, especially when it comes to commercial real estate investment, an investor would have to have a lot of personal capital to invest into a project or would have to become part of an established investment trust, giving up some control in order to earn some returned income. With real estate crowdfunding, those traditional bars have been removed and a savvy investor could get involved with as little as $5,000 for some companies and make passive income without the risk that comes from owning and managing a property. This investment strategy is especially popular among millenials, who have a hard time trusting traditional investment vehicles after coming of age in one of the most volatile work and investment eras in the history of the United States.
What Is The Borrower Advantage?
There are also multiple borrower advantages to choosing crowdfunding over traditional channels. For one thing, after the crash of 2008 and the regulations put in place to address the factors that led to the financial crisis, many banks have chosen to pull back on smaller investments that they deem not worth the risk. Crowdfunding allows smaller businesses to find the funding they need for a business that a traditional bank might overlook. Everything happening in a digital landscape with structures put in place by tech geniuses reduces the window of time it takes to find funding, as well as the overhead that comes from paying bank personnel and, with the right platform, increases transparency throughout the investment process.
Outlining The Risks
As with any new investment system, there are risks that need to be weighed for both investors and borrowers. As an investor, you need to be extremely cautious and do your research on the system that you invest your money into. Many real estate crowdfunding sites are created by tech gurus with little to no understanding of how real estate works or what factors truly affect an investment. Some have even had to close their doors because they weren’t prepared for the factors that they needed to be as a platform. As always, do your research or contact a professional team to explain your options.
As a borrower, you need to be aware that some investment platforms allow for non-accredited investment, which is both a good and a bad thing. While the vetting and establishment process is usually what makes bigger investment vehicles inaccessible to the smaller business owner, that process also usually protects the business owner because of the regulations and structures put in place already. Some investors are backed by accredited venture capital groups, which helps clear up that uncertainty, but it also means that there is a different level of expectation and accountability if they choose to invest in your small business.
Overall, it’s an exciting time to be involved in the real estate industry. Historical changes have carved out new ruts and made for new practices in real estate these days and one of those things is the advent of real estate crowdfunding. If you’re interested in getting involved in the industry, but aren’t quite sure what step to take next, speak to a professional team like the group at LCI Realty. Give us a call today at 480-565-8981.