Crowdfunded real estate can be a lucrative type of real estate investment, but it isn’t right for everyone. With that in mind, here’s a beginner’s guide to investing in real estate crowdfunding deals that can help you determine if it’s a good fit for your risk tolerance and investment goals.
What is real estate crowdfunding?
Crowdfunding refers to a group of people who pool their money together in order to achieve a common goal. Some crowdfunding activities are charitable in nature — for example, if a person is facing medical bills they can’t afford, they may attempt to crowdfund the expenses. Crowdfunding can also apply to investment situations, and real estate is one of the latest applications that has gained popularity.
Real estate crowdfunding involves a group of investors who each contribute money to a specific real estate deal. For example, if an experienced real estate investor identifies a lucrative opportunity to renovate an apartment building and then sell it at a profit but doesn’t have the necessary capital, they might turn the investment into a crowdfunding opportunity and attempt to raise the rest of the necessary funding from investors like you.
How does crowdfunded real estate work?
The general idea behind real estate crowdfunding is that when a developer or experienced real estate professional identifies an investment opportunity, they don’t always have the ability (or desire) to completely fund the investment on their own. So, they’ll allow individual investors to contribute some of the project’s capital in order to raise enough money to execute their plan.
There are three key players in any crowdfunded real estate investment opportunity.
First, the sponsor is the individual or company that identifies, plans, and oversees the investment itself. The deal’s sponsor will facilitate the purchase of the asset, arrange for any contractors or other needed work, arrange financing, and take responsibility for the eventual sale of the property.
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