Real estate crowdfunding has experienced tremendous growth in popularity and awareness over the past few years. More and more investors are turning to real estate crowdfunding to diversify their portfolios.
The advantages of real estate investment in general are well known and include the benefit of investing in an asset class that is not closely tied to the stock market, and is thus less prone to price fluctuations. What are the advantages to the investor of real estate crowdfunding in particular?
Before the passage of the JOBS Act, real estate sponsors were mostly limited to tapping their friends and family networks for equity capital. Well-connected individuals thus had the opportunity to hear about real estate deals in need of investment capital. However, not everyone personally knows a real estate sponsor, so many potential investors were excluded. Since sponsors are now allowed to widely advertise their deals online, many more accredited investors have access to them.
Access is further enhanced by the fact that real estate crowdfunding investments are easy to initiate and complete online; investors can often sign all documents digitally, and in-person meetings are not required.
Financial professionals usually recommend that their clients diversify their portfolios among multiple investment types to balance risk and return potential. Depending on the investor, real estate should comprise up to 25% of a portfolio. Real estate crowdfunding allows investors to easily add a real estate allocation to their holdings, and also to diversify among multiple asset classes, investment types, investment strategies, and geographies. Investors can easily participate in both equity and debt offerings from across the country.
Passive Investment with Direct Ownership
Many potential real estate investors are intimidated by the prospect of directly managing investment properties, and prefer to remain passive investors. In the past, unless they knew a sponsor and could participate in a syndication, these investors were often limited to investing in REITs, which do not allow investors to choose individual properties or even to know what properties they are investing in. Although the real estate crowdfunding space includes funds, portfolios, and even REIT products in addition to individual investments, investors almost always know what underlying properties they are investing in.