Is Real Estate Crowdfunding Right for You

Is Real Estate Crowdfunding Right for You?

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Whether you’re interested in commercial real estate, residential real estate or a combination of both, there’s one constant every investor requires for any deal: money. You can spend years in the industry, and you might still find yourself wondering the smartest way to raise funds for your next real estate project. Meanwhile, newcomers to real estate investment might find their struggle two-fold. They might wonder where to find capital and where to invest said money once they’re funded. For either scenario, you might find what you’re looking for in real estate crowdfunding.

Table of Contents - Is Real Estate Crowdfunding Right for You?

Want to know more about this investment possibility? Here is an overview of how real estate crowdfunding works.

What is real estate crowdfunding?

You’re likely familiar with the concept of crowdfunding. When an entrepreneur has an idea (be it a movie, an invention, a video game, etc.), they will set up a fund on a crowdfunding website to generate money from public donors.

Real estate crowdfunding operates similarly. Someone with an eye on a property heads to one of Canada’s increasingly popular crowdfunding sites and puts forward a proposal, and you can decide if you want to invest. The difference between typical crowdfunding and real estate crowdfunding is simple: instead of getting tangible product perks, you get a return on your investment. Of course, how big or small that payout depends on your initial injection of cash.

Real estate crowdfunding also has the added benefit of allowing investors to skip the less desirable parts of being a landlord — collecting rent, general maintenance, soliciting tenants, etc. For a lot of people who would rather deposit their money and then wait for the return without having to do anything else, crowdfunding isn’t a bad idea.

Independence from REITs

For those people who have researched the industry before their initial investment, you might read about crowdfunding and think it sounds like a real estate investment trust (REIT). They operate on a somewhat similar basis, and in fact, many crowdfunding platforms funnel their investors’ cash into REITs. That said, there’s one major distinction between crowdfunding and REITs.

When you put your money into a REIT, they will determine the eventual payout on property. Often, REITs (especially those earmarked for aggressive growth) will use a significant portion of their profits from a deal to invest in projects of their own choosing. That works for passive investors who are content to let an experienced professional guide their investment. For those who want to take a more active role in their investment dollar but don’t want to handle the day-to-day, crowdfunding is perfect.

Please note: Because most crowdfunding choices are governed by REITs, it’s critical that you, as a savvy investor, have some understanding of which REIT will be spending your cash. Some Canadian REITs have extraordinary investment potential. Others, not so much. Just make sure to do your due diligence before dropping your money.

Consider your crowdfunding location

The entry point into Canadian real estate is rising every day on a national level. In Toronto, the average cost of a home has reached record-high levels. That isn’t the case for every real estate market, however. You might discover that raising the recommended 20 percent down payment amount is much easier in rural areas or smaller towns.

You can make your location work both ways when it comes to real estate crowdfunding. If you’re in a city and you’d like a large stake in a project, you can use crowdfunding to find something in the right location. If you’re in a rural environment and want to try urban real estate, crowdfunding is the way to go. The reason both strategies have potential is simple: crowdfunding removes the concern that you will have to manage the day-to-day operations of your real estate investment.

What returns are you looking for?

One of the most attractive benefits to a crowdfunding real estate investment is the incredible return on investment. By law, REITs (which, again, power most of the Canadian crowdfunding platforms) must return at least 90 percent of their taxable income to their investors. As a result, when it’s held for a long enough time, your investment could yield incredible returns by the end of its run.

Keep it diverse

If you’re actively involved in real estate investment, and you’re thinking about diversifying your portfolio, then you’re on the right track. There are serious benefits to adding different types of investments to your real estate portfolio, especially if you want earnings that are prepared to meet both your short- and long-term income goals. If your traditional real estate investment is taking a while to yield returns, and investment in a crowdfunded real estate platform could be an excellent way to generate regular income while you’re waiting for your big payday.

What is your experience level?

After you’ve decided that real estate investment is the way to grow your bank account, you should start by reading about investment. With that said, you can read and read, but eventually, you’ll have to put some money down. Real estate crowdfunding is a smart way to get a foot in the door when that time comes. Investing with several properties on a small basis lets you determine which of your investment strategies works and which don’t, without the concern that you’ll go bust if you make one mistake.

Real estate crowdfunding can be a fantastic option for those who want to try out what they’ve learned without breaking the bank.

The bottom line

There are plenty of things to enjoy about crowdfunding real estate options. They pay well (just remember those taxes!), and they come with relatively little stress. What’s more, they’re easy to do. If you make sure to do your homework about where your investment will end up, real estate crowdfunding can be a great way to diversify or get going in investment.

Real Estate Crowdfunding Investing Explained


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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.