First, a Little Background
The JOBS Act in 2012 made it legal to crowdsource funding online, opening the door to this opportunity to participate in crowdfunded real estate. There are real estate projects, including commercial, industrial, single family homes, and apartment buildings, across the United States. Every one of them needs to be funded, crowdfunding presents a compelling opportunity to offer funding to developers as an alternative to bank financing, which can be more difficult as well as costlier.
Real estate crowdfunding web sites can aggregate funds inexpensively from lots of investors like you and they compete, with the bank, and with other investments to provide top returns to you. In short, you and lots of other individuals invest in particularly projects being funded by professional lenders, who invest in the real estate-backed project, and provide a return to you.
The return can be for debt financing (fixed interest rate plus return of principle after a period), equity financing (might or might not be interest, capital appreciation is possible, and usually a fixed period until the project is complete), or preferred equity. Some sites/lenders have high minimums, but lots do not. You can choose to invest based on asset type (office, single family…), and may choose in part based on geography. You can also invest based on your desired targeted returns, trading off among various holding periods and risk levels.
And in some cases, you will need to be an “accredited investor," meaning that you must show a level of annual income in the $200,000 range or net worth over $1 million.
What’s the Trick?
The trick, from what I see, is to do the following.
Pick the right online professional lending company, choose a portfolio of assets that interest you, and watch it closely for your returns. You need to understand that your money will be locked up for the period of the project, and there is downside risk, as well as upside opportunity – the level of which you can choose.
As a project manager, please note that the risk management typically applied by the professional investors resembles the following:
- Receive applications from real estate development companies for financing
- Prequalify the applications based on track record, financial strength, and ability.
- Perform due diligence including review of investment strategy, financials, legal standing, and property condition, and location.
- Approve only the best projects.
In the end, the rigors of this process result in only 5 percent plus or minus of project submitted being accepted and funded – reducing your risk very favorably.
Based on how much money you have available, your risk tolerance level, and your discipline in paying attention to the investment (not a lot is needed), you can achieve returns in the 10-20 percent annually range.
What do you think? Do you think real estate crowdfunding could be valuable as part of your strategy of growing your passive income?