6 Common Real Estate Crowdfunding Myths Debunked
31 October 2023
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Real estate crowdfunding has grown extremely in popularity in recent years as an alternative investment option. By pooling money from many individual investors online, real estate crowdfunding platforms are able to finance higher residential and commercial real estate projects that were previously only accessible to large institutional investors. However, as with any new investment trend, there are also many myths and misconceptions swirling around this emerging industry.
In this article, we will discover and dispel 6 of the most common real estate crowdfunding myths.
Myth #1: Real Estate Crowdfunding Is Too Risky
One of the biggest myths about real estate crowdfunding is that it is an inherently risky investment reserved only for those with a very high-risk tolerance. While real estate does carry risks like any other asset class, crowdfunding platforms actually work to mitigate many of those risks through diversification. By allowing individual investors to put small amounts into multiple projects, the risk is spread out.
Many platforms also hire experienced sponsors and managers to oversee projects, conduct thorough due diligence on properties, and have contingency funds to handle potential issues that arise. Furthermore, properties are often purchased below replacement cost, providing a buffer against downturns. So, while real estate crowdfunding isn’t risk-free, a well-diversified portfolio through a reputable platform carries reasonable and manageable risks similar to other mainstream real estate investment vehicles.
Myth #2: High Minimum Investments Are Required
Another common myth is that you need tens of thousands or even hundreds of thousands to get started with real estate crowdfunding. In reality, most platforms allow investments to start with as little as $1,000 or $5,000. Some may have higher minimums for specific high-end projects, but in general, crowdfunding has made real estate investing much more accessible.
This enables the average individual to build diversified portfolios and participate in larger commercial deals typically out of reach for non-accredited investors. As long as one can devote funds for at least a 5-7 year hold period, the minimum buy-ins are quite manageable these days even for those just getting started in their real estate investment journey.
Myth #3: Returns Are Too Low
Real estate has long been viewed as a stable, income-generating asset class that produces modest yet reliable returns. However, some argue crowdfunding platforms can’t match the return potentials of direct investing due to their fees. But this is an overgeneralization that fails to consider factors like property selection, location, value-add work, and the benefits of amateur management being replaced by professional sponsors and operators.
Top crowdfunding platforms are achieving targeted annual returns in the high single-digits and low double-digits after all fees. Some offerings have even exceeded 15% returns through strategic acquisitions of undervalued properties primed for turnaround. While past performance doesn’t guarantee the future, the return potential through selective crowdfunding platforms is by no means paltry.
Myth #4: Liquidity Is Poor
Illiquidity has long been seen as an inherent drawback of traditional private real estate investing. But crowdfunding has changed this through programs like fractional secondary marketplaces. These allow individual investors to potentially resell portions of their holdings to new buyers prior to the official project maturity date for a small fee recovery.
Meanwhile, the big platforms providing these offerings often have large pools of available capital ready to gobble up such resale interests. While full liquidity before an official exit date can’t be guaranteed, secondary market options at minimum provide an important incremental source of liquidity not previously available. This dispels notions of real estate crowdfunding investments being as rigidly locked up as traditional 1031 exchange properties.
Myth #5: Better To Go Directly Or Through A Private Fund
Finally, some argue cutting out “middleman” crowdfunding platforms and going direct with sponsors or through exclusive private funds will yield superior terms. While direct deals bypass some platform fees, they often require far higher minimums, lack scalable due diligence assurance, and have limited secondary market optionality.
Meanwhile, exclusionary private funds demand accreditation, lock capital away rigidly, come with high minimums of their own, and can still charge similar all-in fees to top crowdfunding platforms while achieving inferior property selections and oversight. Top crowdfunding platforms meanwhile democratize access to deals, mitigate risk through diversification, and drive better terms through scale – including potentially realizing real estate crowdfunding tax benefits available through specific REIT structures. For most investors, they offer an optimal publicly available solution.
Related: Fueling Investment Growth With Real Estate Fundraising Enablement
Myth #6: High Fees Will Eat Away Returns
Critics argue real estate crowdfunding platforms simply skim too much off the top through management, acquisition, disposition, and sponsor success fees. But these claims often fail to put fees into proper context. Public REITs, for example, commonly charge 2% annual management fees alone.
The all-in fee for a typical top crowdfunding offering, which may include sponsorship, is generally in the 6-10% range based on total project capitalization – and those fees often achieve specific important purposes for both sponsors and investors alike. After factoring in better location selections, value-add work throughout hold periods, and platform due-diligence oversight minimizing downside risks, the fees are actually quite reasonable relative to the overall alpha created. Returns regularly exceed targeted projections after fees.
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