Real Estate Crowdfunding 101: A Guide for Investors

Home flippers and investors are taking notice of the emerging popularity of real estate crowdfunding platforms – and for good reason. With property values continually on the rise, crowdfunding has become a lucrative pathway to funding home flips and investment projectsreal-estate-crowdfunding.jpg

The Basics:

Since the passing of the JOBS Act in 2012, crowdfunding has become a viable way for businesses to solicit individual investors. With lending institutions making it more challenging to gain approval for loans, especially in the case of multiple home flips occurring simultaneously, crowdfunding offers a quick and painless way to get the money needed to start property renovations.

Here are some general guidelines to keep in mind prior to posting an investment opportunity on a crowdfunding platform.

  • Each crowdfunding platform appeals to different types of investors:
    As an example – some websites offer only moderate to low-risk investment opportunities, while others focus exclusively on commercial real estate projects. Make sure you research each platform’s project specifics before you post to increase your likelihood of getting funding.
  • Borrowers need to review each website’s guidelines:
    To protect the integrity of investments, crowdfunding sites impose certain rules on both investors and borrowers. For instance, the majority of websites require that investors go through an accreditation process. Investors must also make a minimum annual salary, often $200,000 plus, because minimum investments on a crowdfunding opportunity usually start at $5,000 and increase from there.
  • Flippers need to understand that investors need to make money too:
    Although funding happens quickly, the downside for borrowers is that they will likely pay a higher interest rate than they would with traditional financing. Although many deals don’t involve equity in the property, the higher interest rate aids in paying out dividends to investors. However, if home flips are done quickly, borrowers only pay the higher rate for a short period of time. Once the flipped property is sold, the loan and the investors can be paid off.

Benefits for Home Flippers

  • Flippers get to widen their pool of investors:
    Since minimum investments start out around $5,000, there will be more opportunity to build a network of investors.
  • The underwriting process is less involved:
    Borrowers who want to place their investments on real estate crowdfunding websites need to go through the underwriting process and have the company examine their past credit and investment histories. However, once the borrower is approved, only the projects need to be underwritten. This allows for house flippers to avoid lag time between projects.
  • Flippers get the chance to better market their projects:
    In lieu of going to a bank to simply ask for a check, house flippers can leverage investment opportunities by pointing out their passion for upcoming projects on real estate crowdfunding sites. They can post photos, add updates, and share goals to appeal to more investors.

Although there is some risk involved with real estate crowdfunding, borrowers who conduct their research will minimize their chances of getting burned. Before choosing a site, house flippers need to guarantee the platform matches up with their project goals.

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