As an educated investor, you likely realize the benefits of holding real estate as some percentage of your portfolio. Historically, in order to invest in real estate you have several options – and to a large degree your options are determined by who you know and how much money you have to invest.
Real Estate Crowdfunding is changing the game by consolidating deal flow, lowering minimum investment entry points, and by adding new levels of transparency.
To fully understand this new market, let's first look at how the real estate investment marketplace has operated up to this point.
While these offer a number of benefits, including liquidity, diversity, accessibility and professional management, they also come with a number of drawbacks. They are opaque, in the sense that you have no idea which real assets you own. They are subject to the volatility of the stock market – which may have nothing to do with the value of the underlying assets. Further, they charge management fees which cut into your returns.
Over a recent four year period, $63B of real estate transactions were financed through private placements. Unless you know someone who can help you get access to these deals, it is very unlikely you will ever have an opportunity to invest in these projects. Traditionally the way you would get access to private deals are through Private Equity, Hedge Funds, and Hard Money Brokers.
Even if you have access to deal flow through one of these sources, you are limited to the deals from that single source. These sources are very fragmented meaning that even those taking advantage of private placements are only seeing a very small percentage of the total deal flow. Further, because of the exclusivity of these deals and the amount of work that goes into marketing them, these outlets require investors to make minimum investments of $25-$50K per deal. Depending on your balance sheet, this may limit your ability to diversify across many deals.
The other way you can invest in real estate is to become an active investor. This will certainly give you more control but will come at a cost of your time and energy. There are two broad categories by which you can become an active investor.
This option includes finding, managing, and owning real estate assets. For many people this is not a realistic option as they don't have the required skillset nor do they desire to be an active real estate operator. Managing tenants, contractors, and other problems that will inevitably arise is unattractive to most people who prefer to invest passively.
This option is a bit more passive because you will not be actively managing day to day operations of the real estate asset. It is active in the sense that in order for you to find deals and properly underwrite them you will need to be active in the real estate community. This means networking, developing relationships and educating yourself on the market dynamics of where you are investing.
To summarize, historically, in order to be a real estate investor, you must have some combination of the following three things to be successful:
Crowdfunding for real estate helps you, as an investor, achieve these three qualifications to becoming a successful real estate investor.
Real Estate Crowdfunding is a new and evolving market. The efficiencies of the web are creating opportunities to consolidate deal flow while adding new levels of transparency. This allows investors to diversify in this asset class from the comfort of your home.