In years past, if you wanted to do a real estate deal, there was basically one way to get it done: Scrimp and save for years to come up with enough capital to convince a bank that you’re a good enough credit risk for them to loan you a ton of money.
Then you (or your real estate agent) would search high and wide for a property to buy. After that, you had to hope and pray the property appraised for the purchase price and then you finally got your loan. That was the old way. Now, thanks to the advent of real estate crowdfunding, there is an entirely new way to get the funds you need to close a real estate deal.
What is Crowdfunded Real Estate?
Imagine for a moment that you come across a great real estate deal, but you don’t have the money to close it. Instead of going to a bank, you gather 50 of your friends and family together to pitch them about the opportunity to buy a small piece of a real estate investment opportunity you identified. Each of them makes a contribution and hopefully, those contributions add up to enough money to purchase the real estate deal you’re pitching.
Then, whoever contributes to the deal gains an equity share based on their individual contributions. Once the deal closes and the profits are made, you divide the spoils and distribute them to your partners based on their individual contributions. This is the very definition of real estate crowdfunding.
Real estate crowdfunding sounds like a new idea, but in fact, it’s actually an old concept. When a company sells stock to raise funds for a new project, that is basically crowdfunding. Before large commercial banks began doing real estate lending in the ’20s and ’30s, crowdfunding was how lots of people bought real estate, too. The difference is that now, online crowdfunding platforms allow you to reach potential investors all over the world as opposed to just friends, family and people in your immediate circle.
Investing in People and Projects
Real estate crowdfunding offers investors a lot of potential benefits. One of the biggest is the diversity of investments available on crowdfunding platforms. Almost everyone realizes that buying single-family homes and selling them at a profit is a great way to build wealth through real estate. But for many years, the larger real estate projects that generated residual income for investors were almost entirely out of reach for small investors.
This is because financing for commercial projects is not insured by the federal government the way many home loans are. What that translates to for investors is a maximum 15-year loan term and no federally subsidized programs that allow them to close on deals with as little as 3% down on a 30-year insured loan. That meant larger down payments and larger monthly payments, which effectively froze out regular investors like you from being able to get income property or buy into any real estate aside from single-family homes.
This is where real estate crowdfunding comes in. Crowdfunding allows investors to buy into a wide range of real estate investments, many of which would normally be out of their reach.
Crowdfunding also offers options for investors with virtually any budget, with minimum investments across different platforms ranging from as low as $10 all the way up to $100,000.
Bottom Line on How to Use Crowdfunding to Invest in Real Estate
Real estate crowdfunding is not a new idea. Investors have been pooling money to buy real estate for decades. However, the difference with real estate crowdfunding is that now you can link up with like-minded investors from all over the country (or the world) to make real estate deals that have historically only been available to well-heeled or accredited investors. The advent of real estate crowdfunding platforms also allows you to look at deals in emerging markets outside of your geographic area. If you’ve been wanting to make a real estate investment, but you lack the capital to buy a property all by yourself, or you want to look at investments in other places without traveling there for due diligence, real estate crowdfunding might be the perfect option for you.
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