Passive Income: 5 Reasons Experts Use Real Estate Crowdfunding
Finance experts often cite real estate investing as one of the best ways to earn passive income. Real estate crowdfunding is an especially good way of getting into this type of investing without becoming a landlord or even owning property outright, while still earning a return on your investment.
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Real estate crowdfunding is the process by which a group of investors fund a real estate project together, according to Alex Coffman, a real estate agent and co-owner of Teifke Real Estate.
“This can be accomplished using an online platform where investors can browse and select projects to invest in. Once enough funds have been raised, a professional team develops and manages the project, with investors receiving regular updates,” he said.
If you want to get into real estate investing but don’t have a lot of money to invest, don’t want to manage properties or just want to dip your toe in, experts explain why real estate crowdfunding may be the best way to generate passive income.
It’s More Accessible to Different Investors
Real estate crowdfunding is a good avenue for generating passive income primarily due to its accessibility, according to Dennis Shirshikov, a real estate expert at Awning and a professor of finance and economics at the City University of New York.
“Unlike traditional real estate investments, crowdfunding allows individuals to participate in the property market with a significantly lower financial outlay,” he said.
What Shirshikov calls a “democratization of real estate investing” makes it accessible to a wider range of investors who might not have the substantial capital typically required to purchase property outright.
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Minimum Investments Can Be Low
Indeed, minimum investments can start as low as $500, making it a viable option compared to the hefty down payments on traditional property purchases, added Rod Khleif, real estate investor and host of the top-ranked iTunes podcast Lifetime CashFlow Through Real Estate.
Though he warned that diversification is key to success in this method, because “spreading your investment across multiple projects mitigates risk.”
Shirshikov agreed that diversification is key and shared a scenario where an investor, through a crowdfunding platform, was able to invest in both a multi-family unit in a burgeoning urban area and a commercial retail space in a different region.
“This strategic spread not only balanced his investment portfolio but also safeguarded against market fluctuations in a specific real estate sector,” Shirshikov said.
Returns on these investments vary depending on the project type, location and market conditions, Khleif said. “Expect annual returns typically between 6% and 12%, distributed as dividends or upon property sale.”
It Offers a Variety of Projects To Choose From
Moreover, real estate crowdfunding platforms often curate a variety of projects, Shirshikov said, ranging from residential developments to commercial real estate, which offers “a level of diversification that can be challenging to achieve through individual property ownership.”
It Allows You To Pool Funds With Others
This kind of investing involves pooling funds from multiple investors to finance real estate projects, which means a group can invest in a greater dollar amount together than any one of them might individually.
“The platforms typically function as intermediaries, vetting projects and offering investors a choice of properties in which to invest. The financial outlay can vary widely, depending on the platform and the specific project,” Shirshikov said.
But Research Is Necessary
Of course, it’s not without some effort. Identifying reputable and successful crowdfunding groups requires due diligence, Shirshikov said.
“It’s crucial to research the track record of the platform and the types of projects they handle. Look for platforms that offer transparency in their operations and have a history of successful project completions and investor returns,” he suggested.
The timeframe for seeing a return on investment in real estate crowdfunding can vary, as well, Shirshikov said. “Typically, investors might start seeing returns in the form of rental income or interest payments within a few months to a year, but the realization of significant capital gains often takes longer, potentially several years, depending on the nature of the project.”
Returns Are Consistent
While returns may take some time to generate, according to Seamus Nally, CEO of TurboTenant, one of the biggest reasons real estate crowdfunding can be an excellent way to generate passive income is that you can typically expect returns to be pretty consistent.
“While no investment out there is without its risks,” he said, “real estate crowdfunding is one of the lowest-risk options available for people.”
And, he said those returns should come in at a pretty predictable rate and amount, which ultimately allows that passive income you’re earning to be predictable — helping your financial planning.
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