The traditional method of securing funding for real estate investments involves using established lenders who are offering relatively straightforward loans. These loans can sometimes be difficult to find, and even if somebody does get the money, that person’s property must be profitable in a relatively short amount of time in order to pay off the loan’s principal plus interest.
There is, however, a new form of funding that has been used primarily for product development, but it is now branching out into real estate.
What is Crowdfunding?
Crowdfunding is the idea of raising money directly from the public through recognized websites. It became a $5+ billion industry in 2013, and it is continuing to expand in terms of both resources and outlets. Social media sites have provided crowdfunding with a grass-roots flavor that has helped businesses and entrepreneurs get innumerable projects off the ground in ways that would have been difficult — if not impossible — with traditional lending.
Real estate is one of the latest industries to take advantage of the crowdfunding movement. According to one company, iFunding, the combined market for crowdfunding and real estate investing in the U.S. is roughly $11 trillion. There are a number of possibilities for real estate investments when you combine crowdfunding with peer-to-peer lending.
Advantages & Disadvantages
There a number of upsides to crowdfunding, but there are also a few downsides as well. One must consider all available information before choosing what investment strategy is best for them.
- You gain access to real estate deals despite limited money
- You work directly with experienced real estate developers
- You can choose specific projects to invest in
- You can lower your risk by diversifying your real estate portfolio
- Access to high returns
- Your money may be lost if the market slips
- You have a higher risk of default compared to direct or peer-to-peer lending
- Your investment is less liquid compared to other potential investments
- There are restrictions on simple selling access for the investor