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Hackernoon logoIs Real Estate Crowdfunding Worth It? by@Dmitry_Tsyplakov

Is Real Estate Crowdfunding Worth It?

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@Dmitry_Tsyplakov Dmitry

Dmitry Tsyplakov CEO/Product Owner, Fincase – #1 Property Technology Company across Russian market


Curt M. Westfield , managing partner of WC Companies in Tampa , Florida, says 9 out of 10 millionaires have made their fortunes by investing in real estate. Actually, this is the secret of the so-called American dream - you invest money in some premises and start increasing your capital every month, without making any special efforts. 

But in order for a dream to become a reality, you need to have an impressive initial capital. To become a full-fledged investor in the United States, you must earn at least $200,000 per year for at least two years and have a net worth of over $1,000,000. What if you have only a couple of thousand free money on your account that you want to make it work? 

Until recently, one could try to become a so-called co - investor, when a group of people gathers and everyone invests a certain amount. Then the premises are bought, rented out, and each co-investor gets his own interest. However, very often people who just wanted to make some money fell into the hands of scammers. No money, no premises, and of course no profit. In addition, “managerial” problems arose - who received how much, how to draw up transactions, who was responsible for the premises, and so on.  

In 2016, the Jumpstart Our Business Startups Act came into force, which lowered the financial threshold for "accreditation" of investors and allowed them to participate in crowdfunding, investing at least $500. 

That is why this new direction is sprouting in America. In fact, you also become a shareholder, a co-investor, but with more transparent and understandable terms.  The only drawback of this story is that the trend  has been up new and hasn’t  yet had any common criteria and scenarios. 

That is, some platforms buy real estate themselves, while other collected money is transferred to experienced investors. There are differences in making a profit: someone will get their money back in a month, and someone will start receiving income in a few years. 

At the same time, experts say that on average, the income from such investments can be about 10% per year.There are dozens of crowdfunding platforms in the US market and they will all be different, with their own pros and cons. 

One thing I can say with certainty - crowdfunding is not able to completely free one from the risk of being left without money, but it minimizes the possibility of meeting fraudsters, and it is also an excellent option to get rid of the headache for the selection and maintenance of premises. 

In addition, the SEC (US Securities and Exchange Commission) has set limits that will prevent you from losing all your money and staying on the street. For example, if your income is less than $ 107,000 per year, then you can invest no more than 5% of your income. If more than 107,000 dollars, then no more than 10%. 

Before starting to work with crowdfunding, it is important to understand such concepts as debt and equity investment instruments. 

Equity investment generates income through the lease of the purchased premises or through the difference between buying and selling real estate. 

Most crowdfunding deals work in this scenario. That is, an investor is a shareholder of a certain property, and his share is proportional to the amount he invested. Refunds - income - are made as a percentage of the rent on that property, minus all service fees paid to the crowdfunding platform. 

A big plus in such investment is the absence of restrictions on profitability. Annual profit can be up to 25% of the invested funds. In addition, as I said, the ownership of crowdfunding real estate allows investors to ignore the costs associated with depreciation of premises, for example, with their repair and equipment. 

The only expense will be the commission of the platform itself to maintain the investor's position. As a rule, it is 1-2% of the total investment amount. Moreover, crowdfunding transactions usually go through a pass-through organization, which means that the investor can take advantage of the depreciation charge without having direct ownership of the property. 

The disadvantages of this method of investment include the timing of receiving funds. Usually 5 to 10 years old. Therefore, you will not be able to make money quickly. However, this can be said about the entire field of real estate investment. If you want to make really meaningful profits, you shouldn't count on speed. 

Investments in debt real estate include making loans or investing in mortgages. That is, the investor in this case is not a co-owner, but a creditor or sponsor of the transaction. Here investors are limited in income by an interest rate on the loan of about 8-12% per year and the amount of investment. 

But at the same time, the risks of losing your funds are minimized, since the real estate itself acts as a guarantor of the transaction. In addition, debt investments are most often associated with development projects, and their advantage is a quick profit - from six months to a year. 

But on the other hand, no one is insured against early repayment of the loan, which will entail a change in the final profit and the termination of cash flow for a particular transaction. 

In any case, crowdfunding is an opportunity to enter the game, an a good option to try yourself as an investor without risking a lot of money. I think it will take a little more time and this type of investment will become familiar to ordinary people.  

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