Do you like the thought of a more passive real estate investment strategy? Crowdfunded real estate is one alternative to traditional REITs that’s worth looking into.
Overview
- Up-Front Investment: Minimums vary by platform. Can be as low as $1,000.
- On-Going Investment: None, unless you choose to continue adding more money to your portfolio.
- Return on investment: Your money will generally be locked in for at least 5 years. Selling early will result in penalties. You will earn a % dividend paid monthly.
- Best for: Anyone looking for a passive and flexible investment strategy.
What Is it?
Chances are, you have likely heard of LendingClub or Prosper before. These are platforms that connect micro investors with everyday people who would like to borrow a sum of money to pay down debt or finance a purchase. These peer-to-peer platforms have made headway for new real estate focused platforms.
RealtyMogul and FundRise are two real estate centric platforms that take a similar approach of having multiple micro investors put in a sum of money (a few hundred to a few thousand dollars) to fund income-producing real estate projects.
In return for investing in the project, you’ll get a % dividend usually paid monthly. This is similar to a REIT. The difference is that, when crowdfunding a real estate project, you cannot simply sell whenever you choose to. Instead, you’ll need to count on this as a long-term investment strategy and keep your money in the pool for a minimum of 5 years. Most platforms will charge a penalty for taking your money back any sooner.
Additionally, these platforms often have long wait times (up to 90 days) when you do choose to get your money out, so read the fine print and keep these terms in mind when investing.
The Pros
The number one pro of crowdfunded real estate is the flexibility to get started with a minimal amount of money and, if you so choose, add to it as you go along. You’ll get to keep your money in the investment pool and receive a % dividend on it.
The Cons
The biggest con is that crowdfunding real estate is still a rather new strategy. Dividend rates will vary, and your income could lose its value. You should also consider that you will not simply be able to pull your money out whenever you choose.
You should count on leaving it in for at least five years and read the fine print about holding times and early withdrawal penalties.
Summary
Crowdfunding a real estate project may be one of the most modern ways to get into the lucrative real estate market, but it does come with risk. Just like with any investment, your project may fail (lose its value) or the dividends may be much lower than expected. This is a long-term investment strategy with a minimum investment horizon of 5 years, and you should treat it as such.
Don’t put any money into a crowd funded project that you want to use in the next few years and don’t expect to live off your dividends, but this is a good way to diversify your savings/investment portfolio.
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