Have you ever wanted to own a skyscraper? How about an entire apartment complex? Well, good news, now you can! And, you don’t have to meet “accredited investor” requirements. How? It’s called crowdfunding!
Crowdfunding is an online platform that allows individual investors to pool their money together to purchase something they may not be able to buy on their own. Before May 2016, the Securities Exchange Commission (SEC) only allowed accredited investors to buy into these investments. To be an accredited investor, one needs to meet certain net worth or annual income minimums. Thanks to these changes, today anyone can purchase a share of these real estate transactions. But before you do so, is it right for you?
According to the University of Cambridge Judge Business School, in 2015 crowdfunding real estate transactions topped $1.2 billion; over three times the amount in 2014. The growing popularity and recently lifted financial restrictions has opened the door for everyone, including a swarm of uneducated investors. To avoid potential poor financial decisions, let’s highlight some key components to think about:
Professional Research:
There might be more to know than location, location, location. The average investor typically does not have the time, energy, or expertise to navigate through these real estate transaction options. We recommend finding a professional who can help with proper due diligence.
Limited Liquidity:
When you purchase a single real estate crowdfunding investment, it’s not like purchasing a mutual fund that can be sold at anytime. Before you decide to invest in a crowdfunding option, you need to understanding how long your money might be locked into the deal. With a crowdfunding investment, the money you’ve invested is no longer readily available to you – even if you lose your job and need the money to pay your monthly mortgage! Remember, as with any investment, the focus should be on long-term growth versus a short-term gamble.
Understanding Isolated Industry Risks:
The real estate industry has a supply-and-demand risk that can be similar to investing in the stock market. Furthermore, anytime you purchase a single investment versus multiple investments, you decrease your diversification and increase your potential risk. When you increase your risk, it doesn’t necessarily mean you’ll receive an equivalent increase in your return!
Research the Crowdfunding Platform:
Currently, more than 125 crowdfunding platforms exist. According to Jason Best, a partner at Crowdfund Capital Advisors, you’ll want to consider comparing associated fees, the quality of property management, and the sustainability of the platform. As with any new industry, it’s safer to choose among the larger more-established companies such as Realty Mogul, Realty Shares, and iFunding, to name a few. However, given the industry is still in its infancy, even with these larger online companies there are no guarantees. Our recommendation: Read the fine print!
If you’re looking for more liquidity and diversification than you will get with a single real estate purchase, crowdfunding companies like Realty Mogul and Fundrise also offer traditional Real Estate Investment Trusts (REITs). REITs are popular financial investments that have been around for a long time. They invest in a variety of commercial properties nationwide and offer investors plenty of options with strong management track records.
Summary
Owning a skyscraper – or even a piece of one – has a certain cachet attached to it. It’s more glamorous and personal than investing in REITs. But before you dive headfirst into your first crowdfunding purchase, be sure to weigh your options and understand the investment. Whether crowdfunding is right for you or not – the crowd agrees – it’s here to stay.
If you’re interested in learning more about this topic, I suggest you listen to podcast Episode #108, “Investing in Real Estate Via Crowdfunding Platforms,” on J. David Stein’s website, Money for the Rest of Us.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
