There are many paths to millionaire status, but one of the more common paths is real estate investing. According to The College Investor, 90 percent of millionaires around the world made their millions investing in property. But even within real estate, there are different ways to invest, such as real estate crowdfunding. Some of the more popular, and profitable, means of obtaining wealth for many real estate investors in the U.S. include:
- Fix-and-flip properties
- Rental properties
- Foreclosure and pre-foreclosure investing
- BRRRR investing
- House hacking
- 1031 exchanges
While these are popular methods of real estate investing that have produced much wealth for investors, there is another type of real estate investing that has emerged in the last decade that is also producing wealth for private investors.
The Rise of the Real Estate Crowdfunding Opportunity
Real estate crowdfunding (RECF), which is also known by other names, such as marketplace lending and private real estate lending, combines the concepts of fractional investing and real estate syndication. The ability to collect funds from multiple investors in different geographical locations and pool them into a single real estate project while allowing those investors to diversify their individual real estate portfolios through a single portal has grown into its own industry. As a result, there are now more than 100 real estate crowdfunding platforms, many of them specializing in a particular type of investment.
The practice of syndication was popular in the 1980s before the internet went commercial. The idea behind syndication was that several real estate investors could pool their money into a syndicate, which would choose the properties these investors funded and earn a percentage of the returns for managing the investments.
Fractional investing has been around even longer. The advent of internet-based funding, however, made fractional investing more popular and available to the average investor.
Today, fractional investing opportunities are available as debt-based instruments and equity-based investments allowing private investors from all walks of life an opportunity to buy a piece of a real estate deal and see returns on their investments based on the structure of the deal. Changes in securities laws in the last decade have allowed real estate crowdfunding and private lending platforms a legal means of making public offerings that just a few years ago couldn’t occur. That means real estate investments have opened up to a whole new class of investors.
3 Ways RECF Will Offer Better Future Investing Opportunities
Forbes Councils Member Carlos Jose Rodriguez Sr points out three trends in real estate crowdfunding going into 2020. Each of these trends offers private real estate investors grand opportunities for building wealth this year and beyond. These trends include:
- Bigger and better deals
- Institutional capital
- Mergers and acquisitions
Let’s take a quick look at each of these trends.
Bigger and Better Investment Deals
Real estate crowdfunding has become a competitive industry. As the industry grows, and as more real estate developers adopt crowdfunding as a means of raising capital for their projects, the deals tend to get bigger. That’s good news for investors. Bigger deals mean more potential returns, but another side of that coin is that RECF platforms hone their underwriting and risk assessment practices so that the deals that are funded are actually better investments overall.
Institutional Capital Makes RECF More Efficient
Another trend in real estate crowdfunding is the growing interest of institutional investors. Institutions want to protect their wealth and investments. They are not prone to taking unnecessary risks. When institutions and high-net-worth individuals, who are more sophisticated investors, see an opportunity, they will use that opportunity to maximize the return on every dollar invested.
The fact that institutions are taking an interest in real estate crowdfunding means that the industry has reached a level of maturity, and it makes RECF investing more efficient for all investors involved.
Mergers and Acquisitions
Rodriquez points out that not all RECF platforms will survive. With more than 100 platforms currently existing, and many of them specializing in a particular type of investment, it’s possible that consolidation is just around the corner. There hasn’t been much of it yet, but larger platforms could begin to swallow up smaller platforms. Increased stock market volatility could have a negative impact on the profitability of smaller and struggling platforms, which could end up in the hands of larger competitors. That would simply serve to make the market more efficient. In the long run, investors will benefit from better deals and fewer platforms to choose from.
2 More Benefits to Real Estate Crowdfunding in 2020
As always, investors benefit if they don’t put all of their eggs in one basket. Instead of looking at one vehicle for your investments, you can protect against downturns in one category by keeping your portfolio diversified. In other words, if you’re heavily invested in stocks and bonds, branch out into real estate and commodities. Even within the broader investment categories, you can spread your investments around to protect your entire portfolio. If you are not currently investing in real estate through crowdfunding portals like Sharestates, adding RECF to your investment portfolio will keep your assets spread out among different types of investments and protect your wealth.
Another way real estate crowdfunding benefits investors is by allowing individual investors to put up less money for a shorter period of time. Accredited investors can get into most deals with less than $5,000. Depending on the platform, you can get into a lot of deals for less than $1,000. And you can still spread your investments out among several deals on the same platform.
These deals are also for a shorter period of time. Most RECF platforms provide investment opportunities for 12 months or less. These short-term investments allow investors to ride out volatility waves in other markets while maximizing returns on better investments.
RECF Still Requires Due Diligence
While real estate crowdfunding provides individual investors with several opportunities, you should still perform your due diligence. When you check out a RECF platform, you should look at three things:
- What experience and background do the RECF platform operatives have? The founders of some platforms have a strictly technological background. Ideally, you want to invest in a platform where the leadership has real estate experience.
- What are the underwriting practices? Risk assessment is a very important part of any type of investment. How does the platform evaluate the deals it offers to investors?
- Finally, you want to check the platform’s track record. How many deals fall through? How many get funded? How many deals do they fund every year? The quality and the number of deals offered to investors are a testimony to the quality and character of the RECF platform.
If you’ve already made millions on real estate investments through any of the traditional means of private investing, you should consider real estate crowdfunding for the reasons mentioned above.