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Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms I
Advantages,Myths, Tips,
and Platforms.
Crowdfunding:Real Estate
Copyright © 2016 by VerticalRent
All rights reserved. Published in the United States ofAmerica.
DISCLAIMERVerticalRent does not take any credit for creating the images found in this book,these files are acquired from various sources which outwardly claim to be “publicdomain,” and as such no copyrighted images are included with the knowledge of thepublisher of this book. The common sense tips in this e-book should not beconstrued as legal advice. These are guidelines that will help you as a landlord,property manager, or tenant screening provider. Local laws and regulations may differin your area. Be sure to consult with an attorney before rejecting an applicant andensure you are following fair housing laws.
Contents
Introduction............................................................................................................................................................2
T h e A d v a n t a g e s o f R e a l E s t a t e C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
D e b u n k i n g C r o w d f u n d i n g M y t h s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
T a x A d v a n t a g e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Basics of Real Estate Crowdfunding..........................................................................................................6
8 A c t i o n a b l e T i p s f o r I n v e s t i n g i n R e a l E s t a t e C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4 P r i m a r y A c t i o n s t o R a i s i n g C a p i t a l T h r o u g h C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0
8 P o p u l a r R e a l E s t a t e C r o w d f u n d i n g P l a t f o r m s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Conclusion..............................................................................................................................................................13
Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms 2
Once the JOBS Act was passed in 2012, the concept of crowdfunding exploded inpopularity, allowing money to be raised for everything from small businesses to realestate developments. What exactly is crowdfunding, and is it a good option for youas an alternative to investing in traditional real estate?
Crowdfunding is the ability to raise money through small contributions from multipleindividuals. The concept of crowdfunding has become more widespread thanks tothe extensive adoption of online usage and social media. Companies such asKickstarter have managed to raise millions of dollars for all types of projects.
Although real estate is relatively new to crowdfunding, the potential in this space ismassive. With crowdfunding, it becomes possible for investors to gain access to awide variety of properties using an online platform. Investors typically invest smallamounts of money, sometimes as little as $1,000, into properties. Ourcomprehensive guide will take you through the evolution of real estatecrowdfunding. From the advantages, to the myths, to the basics of getting started,and practical tips to move in from amateur to expert. First off, let’s focus on the top3 advantages of real estate crowd funding.
Introduction
3Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
The Advantages of Real Estate CrowdfundingReal estate crowdfunding offers investors a number of benefits, particularly whencompared to purchasing a rental property or investing in a real estate investmenttrust, also known as a REIT.
1. Greater Transparency
The information regarding an underlying investment can often be limited with a
REIT. This can make it more challenging to determine whether the investment is
sound. Crowdfunding platforms typically research each deal before making it
available so prospective investors have as much information as possible to make
the most educated decisions.
2. More Accessibility
In the past, in order to invest in a real estate deal, an investor would often need
to have tens of thousands of dollars. Crowdfunding has lowered the bar, making
real estate investing far more accessible to the average investor. The minimum
investment for many deals is $5,000 or less.
3. Improved Diversification
Investors have a far greater opportunity to diversify their investments with
crowdfunding because they are exposed to entirely new asset classes.
The advantages of real estate crowdfunding will only continue to grow as the marketmatures. You have to keep in mind that this is a relatively young business practice.Now that we covered some of the advantages, let’s take a deeper dive into themyths around crowdfunding your next real estate deal.
4Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
Debunking Crowdfunding MythsMany times, investors are hesitant to becomeinvolved in real estate crowdfunding due to anumber of myths that have been perpetuated.Because of regulatory changes as well as recentdevelopments in technology, it has becomepossible to connect investors to real estatedeals in ways that were never before possible.The entire process is extremely convenient,efficient, and fast. For those who are hesitant toget involved in crowdfunding, it’s important to understand the truth about this newapproach to investing and raising capital.
Ø Myth #1. The Only Deals Available on Crowdfunding PlatformsAre Bad Deals
There is sometimes a misconception that the only deals available on crowdfunding
sites are bad deals because their principals are not able to raise capital anywhere
else. The truth is that the decision to raise capital on a crowdfunding site has no
connection to quality. Many project sponsors choose to raise capital on a
crowdfunding site because it offers faster access to capital.
Ø Myth #2. A Crowdfunding Platform Is Essentially Just a MarketingWebsite
It should always be understood that, as is the case with anything, some
crowdfunding platforms naturally will be better than others are. Some sites simply
will not conduct as much due diligence as they should. Other sites will be quite
diligent about researching deals. This is why it is essential that you take the time
to select the real estate crowdfunding site you will use carefully.
5Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
Ø Myth #3. The Best Platforms Offer the Most Deals
The number of deals offered on a site does not indicate the success of the
platform. Simply because one platform offers a large number of deals does not
necessarily mean those deals are of a high quality. This could simply mean that
particular platform conducts less screening. Instead of looking for quantity when
researching a platform, look for quality.
Ø Myth #4. Investors Can Lose Their Money if the Platform GoesOut of Business
A reputable platform will always ensure that a transaction is structured in such a
way that investors are protected. This means that a bankruptcy contingency plan
should always be in place.
Don’t let fear hold you back from dipping your toes into real estate crowdfunding.Sure, there is risk involved in any path you decide to take. It’s risky to hand the bank$40,000 USD of your hard earned money for the 20% deposit they require on thatduplex you’ve been eyeballing as well. What if you can’t find tenants quick enoughto cover the mortgage? What if this, what if that? The key is to take calculated risksand realize that fear mongering is prevalent in every industry. Often times it’s theinvestors making the most money at something such as crowdfunding whom areperpetuating the fear amongst the general investor population. What better way tokeep the competition out than instill fear into the process?
6Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
Tax AdvantagesWith real estate crowdfunding, investors are able to take advantage of certain taxbreaks, including depreciation. In the past, these tax benefits were only available ifyou owned an investment property on your own. We suggest that you speak withyour accountant about all of the specific tax advantages. We’re not qualified tospeak about the specifics, but do know that certain tax break exists in this realm.
Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms 7
The Basics of Real EstateCrowdfunding
Now that we covered the primary advantages, the myths, and the fact that you canbenefit from a tax perspective – are you convinced that real estate crowdfundingmight be something to consider? If so, it’s important to understand that there aretwo different approach with real estate crowdfunding.
Ø Approach #1 - Equity Investments
With equity investments, investors are able to make investments in residential or
commercial properties. In exchange, investors receive an equity stake in the
relevant property. Each investor will also share part of the rental income generated
by the property.
Ø Approach #2 - Debt Investments
In this type of investment, investors invest in mortgage loans related to specific
properties. A share of the interest is paid to investors as the loan is repaid.
In determining whether equity investments or debtinvestments are the best option, it’s important tounderstand that equity investments tend toprovide a larger return potential. This is becausethe profitability of debt investments can besomewhat limited due to the interest rate on theloan. Conversely, equity investments do carry agreater amount of risk. It should also beconsidered that equity investments usually have alonger holding period.
Now that the theory is out of the way, let’s talk about actionable tips that will takeinto to the discipline of real estate crowdfunding. Knowledge is Power, but AppliedKnowledge will take you from Point A to B. Our recommendation is to start smalland put these practical tips into action quickly.
8Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
8 Actionable Tips for Investing in Real Estate CrowdfundingOnce you have made the decision to participate in real estate crowdfunding, it’simportant to know how to proceed to ensure the best possible experience. In ourresearch, we found 8 actionable tip that will put you on the right track:
1. Research Your Real Estate Crowdfunding Platform
Before choosing a real estate crowdfunding platform, take the time to do some
research. Be aware that real estate crowdfunding platforms can differ. Because
of this, some platforms may be a better fit for your needs than others are. Taking
the time to research different platforms can help you to identify both the strengths
of weaknesses of each.
2. Vet Investments on Your Own
While it is true that most platforms will spend
some time researching investments, it’s also
important that you review them on your own.
Before you make the decision to invest in a deal,
speak to a financial advisor about the specifics of
the deal to help identify any prospective issues.
3. Determine the Liquidity Schedule
Bear in mind that the liquidity schedules for real estate deals can vary from one
property to another. Make sure you understand how long you will be locked into
a prospective deal before you make an investment decision.
4. Diversify Your Risk
Real estate investing can be an excellent way to diversify your investments, but
it’s also important to make your risk is also diversified.
9Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
5. Research the Sponsor
Be sure to research the sponsor behind a deal before
making a decision. For instance, what is the sponsor’s
track record? What other types of projects has the
sponsor handled? Does the sponsor have experience
with handling this specific type of project? How long
has the sponsor been in business?
6. Review the Pro Forma
What assumptions are the sponsor and the platform making? Keep in mind that
poorly based assumptions can lead to projections that can be quite unrealistic.
7. Research Relevant Regulations
Make sure you understand whether you are classified as an accredited investor
and the laws that apply to accredited investors. According to the SEC, an
accredited investor is an individual with an annual income of at least $200,000
during each of the last two years or who has a joint income with a spouse of more
than $300,000 during those years. An accredited investor may also be defined
as someone who has a net worth or joint net worth with a spouse greater than
$1 million, not including the primary residence.
8. Review the Fine Print of the Deal
All projects are unique; therefore, it’s vital that you understand what will take
place in the event something should go wrong. When possible, try to have an
attorney who is familiar with real estate investments review the details of the deal.
The aforementioned actionable tips will help guide you, but what about raisingcapital quickly? How can you raise money for that next apartment complex deal?Here’s how:
10Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
4 Primary Actions to Raising Capital Through CrowdfundingWhile real estate crowdfunding offers an array ofbenefits for investors, it can also be advantageousfor borrowers. For borrowers who need to raisecapital for development projects, crowdfundingoffers the opportunity to gain access to capital withfewer challenges and within a shorter amount oftime. Additionally, crowdfunding also provides thebenefit of lower overhead costs, particularly whencompared to borrowing from a traditional bank. Here are 4 primary actions that youshould take initially:
1. Select a Platform
With the number of crowdfunding platforms increasing at such a rapid rate, it’s
important to take your time and choose a platform that is right for your needs.
Among some of the most popular platforms include RealtyMogul, RealtyShares,
Patch of Land, and iFunding.
2. Submit Your Application
Once you have selected a platform, the next step is to provide as much
information as you can about your project. This is done using an online application
form, which allows prospective investors to review your opportunity.
3. Gain Approval
Once your application is approved, you will need to provide additional information
regarding your project. In addition, all principals on the project will need to submit
to a credit check and background check.
4. Market to Investors
The next step is to present your opportunity to accredited investors.
11Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
Every investment opportunity is different, so you should expect it to take the timeto complete the funding process. While it’s not uncommon for debt investments tobe funded quickly, sometimes in a day or less, equity investments can take longerto fully fund.
8 Popular Real Estate Crowdfunding Platforms
Experience is critical when choosing a prospective real estate crowdfundingplatform. Below are some of the more popular real estate crowdfunding platforms.
1. RealtyShares
This tech-savvy platform provides investors with a minimum investment
opportunity of only $5,000. Accredited investors are able to browse through
multiple pre-screened commercial, residential, mixed-use, and retail properties.
Since projects are presented to investors via the platform, borrowers can benefit
from a fast-tracked process for raising capital.
2. RealtyMogul
This platform is known for connecting accredited and institutional investors with
an extensive selection of equity and debt real estate investments. In addition, this
platform offers a choice of equity and debt financing for borrowers. The minimum
investment on RealtyMogul is $5,000.
3. Patch of Land
This peer-to-peer real estate lending platform matches institutional and accreditedinvestors who are looking for short-term, high-yield investments to borrowersseeking funding sources for rehabbing real estate properties.
4. iFunding
This platform provides single-family residential projects and commercial retailprojects. The minimum investment is $5,000.
12Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms
5. RealCrowd
This platform has proven to be particularly successful, largely because it was
designed by a combination of tech gurus and real estate professionals.
Investments through this platform tend to be professionally managed commercial
projects.
6. Prodigy Network
This is one of the largest crowdfunding platforms in the world today, and it is also
extremely popular. Prospective investors should know that this platform tends to
focus on larger commercial projects. Compared to most other crowdfunding
platforms, Prodigy Network offers a higher minimum investment level.
7. Fundrise
Investors searching for an entry-level platform will find Fundrise to be a good
option. This is largely due to the lower minimum investment level, which allows
investors to begin with as little as $100. Many of the projects handled through
this platform are smaller in scope compared to projects available through other
platforms due to the minimum required investment. Even so, investors who are
just getting started may find the small-scale projects to be quite rewarding.
8. PeerStreet
Among peer-to-peer lenders, PeerStreet is one of the most well-known platforms.
Using a data-driven approach, this platform is able to focus solely on debt
financing. The lowest investment level on PeerStreet is $1,000.
Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms 13
Real estate crowdfunding has become known for revolutionizing the way in whichindividuals invest in real estate as well as how borrowers raise capital for projects.With the ability to remove some of the most challenging hurdles to real estateinvesting while also introducing cutting-edge technology, crowdfunding is breakingnew ground for investors as well as borrowers.
Conclusion
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