Is real estate crowdfunding safe or a risky investment?

Is real estate crowdfunding safe or a risky investment?

The main concern with real estate crowdfunding is investing in a single company with non-liquid assets. Therefore, you lack diversification by investing in one company and lack quick access to your money.

However, investing in real estate crowdfunding can be a very profitable venture if done right. Real estate is one of the top investment vehicles.

It used to be that you needed a lot of money to invest in real estate. Real estate crowdfunding lets everyday individuals get a piece of the action.

You can also receive dividend income from holding real estate. Imagine getting a check for being an investor in properties someone else manages.

Let’s take a look at what you should consider when you want to invest in crowdfunding. Remember, all Investments have risk improperly diversifying helps.

Is real estate crowdfunding safe or a risky investment

This article may contain affiliate links which pays a commission and supports this blog. Thank you for your support! 

What are the risks of property crowdfunding?

With real estate crowdfunding you are investing in a single company. These companies take your investment and purchase properties as an investment. Unlike the stock market, you can’t just buy and sell shares.

Low Diversification potential

Investing in a single company is usually risky. Real estate crowdfunding has diversification in the form of multiple properties. However, the management of the company can be the weak point.

You also have the option to invest in single properties. Therefore, your portfolio really isn’t diversified because you are investing in one property. In some cases, developers trying to sell properties for profit may end up selling for a loss.

The company you invest in needs to be a strong company. Companies fail all the time, just look at all the bankrupt companies like JCPenney’s, Sears, and Payless Shoes. These companies used to be industry pioneers.

Low liquidation

Real estate crowdfunding companies like Fundrise state that they are built for economic downturn. For the most part, Fundrise has done a good job weathering the 2020 coronavirus storm.

However, Fundrise did disallow people from liquidating their Investments. People are hurting to pay rent. Fundrise and other REITs may have people delinquent on rent.

When people are delinquent on rent, it may mean tapping into the company’s cash reserves. Fundrise simply can’t afford to pay you your equity.

Fundrise is separate from the stock market. Should you invest in REITs on the stock market when someone buys your shares when you sell them. You are actually not getting your money from the company. 

I don’t think that Fundrise is going to want to go sell some properties so you can have your money back. 

Keep these risks in mind when considering investing in real estate crowdfunding. It may take you time to get your capital back. While the company may have multiple properties, it is still one company.

Click to Tweet! Please Share!Click To Tweet

Is real estate crowdfunding a safe or risky investment? 

Real estate crowdfunding can be a very profitable investment strategy. However, real estate crowdfunding is still considered a risky investment. Investing in a real estate crowdfunding company has similar risk to investing in a single stock.

Therefore, I would recommend keeping your portfolio diversified. I would recommend investing in something like Fundrise, but you should own other assets as well.

For example, you might own investments in Fundrise as well as Crowdstreet. You can also purchase REITs on the stock market.

Most investment professionals recommend a portfolio containing at least 10 different companies. Should the toast land butter side down for one of your companies then you haven’t lost your entire portfolio.

Is property crowdfunding a good idea?

Owning real estate crowdfunding properties is a great idea if it fits your risk tolerance. Fundrise shows historical returns anywhere from around 9% to 12%. You can use property crowdfunding to diversify your portfolio even further.

Typically, the stock market returns an average annualized return of 10%. Fundrise has shown consistent returns in the 9 to 12% range. 

What is my expected Return on Investment for real estate crowdfunding?

Your expected rate of return varies depending on a variety of factors, including the company you choose and project success. Fundrise has historical rates of return between 9 and 12%. Crowdstreet has an IRR around 23% for currently completed projects.

Click to Tweet! Please Share!Click To Tweet

Where can I invest in real estate crowdfunding?

When you are just starting out in real estate crowdfunding investing you can invest with Fundrise. As you gain more experience, you can make the switch to Crowdstreet. Both crowdfunding companies are one of the best options available.

Fundrise allows you to start investing with a minimum of $500. You can invest into a portfolio of different housing and business projects.Fundrise will continue to monitor your portfolio and make changes as required.

Simply put, Fundrise is the perfect place for beginners to invest in real estate crowdfunding.

Advanced investors can open an account with Crowdstreet. Crowdstreet requires a minimum investment of $25,000 for individual Marketplace deals. You can also open a managed portfolio which requires you to have a minimum investment of $250,000.

Most of you will probably want to start with Fundrise. Investing as little as $500 is a good way to get started and learn the process. In addition, most of us don’t want to risk $25,000 on a single project that may fail.

How else can a beginner invest in real estate?

Investors can also invest in real estate through REITs. A REIT is a Real Estate Investment Trust which is purchased the same as a stock. These companies own real estate projects such as apartments, family homes, and office buildings.

You can also flip homes for profit. Flipping homes it’s more labor-intensive and requires knowledge in home renovation. However, flipping homes is very costly and requires a certain skill set.

You can also take the landlord approach. You can buy investment properties with the sole purpose of renting them out. Property managers can manage the entire property, find clients, and send you a check.

Alternatively, you can buy homes for the sole purpose of renting on Airbnb. It does take more work to rent a home on Airbnb. However, you can make a lot more money then you could with a property manager. 

Click to Tweet! Please Share!Click To Tweet

Summary: Is real estate crowdfunding safe?

As you can see, real estate crowdfunding still possesses risk. However, investing in real estate crowdfunding is one of the best ways to diversify your portfolio. Some investors like to invest in real estate crowdfunding as an alternative to the stock market.

Real estate is something that will always be around. With companies like fundrise, you can invest in property with as little as $500.

With crowdfunding, you are investing in a single company. Usually, you don’t want your money solely invested with one company. 

Your money is invested in a physical asset. Therefore, you may face challenges when you try to liquidate your equity. Never invest any money that you will need immediately. 

You can also invest your money into single property deals. Investing in single property deals is inherently risky. While unfortunate, developers can lose money on deals. In return, you may also lose money on your deal.

Owning property as part of your portfolio is a good idea. Generally, Fundrise has historic returns between 9 and 12%. Crowdstreet experiences an IRR around 23% for completed projects.

Investing in real estate crowdfunding is not the only option. You can invest in real estate through rental properties, REITs, and flipping homes for profit. Each investment vehicle has their own set of risks.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.