Saturday, October 11, 2014

Should you invest in crowdfunding real estate?

If you have a few thousand dollars you’d like to invest for a reasonable return, should you be lured by the growing popularity of crowdfunding real estate?

Because of portals like Realty Mogul, Fundrise and RealtyShares, among others, the big real estate market that was previously out of reach of small investors now offers an open door invitation.

Crowdfunding, as defined by Merriam-Webster, “is the practice of soliciting financial contributions from a large number of people especially from the online community.”

To get into crowdfunding, you the investor (or the crowd) invest your money through an Internet platform (called a portal).

When you invest your money through one of the entry portals, what you are doing is securing part ownership of a real estate project either through unlisted shares of the company or returns on the company’s assets or financial performance.

The projects you invest in are either still in the planning stages, or they are newly completed. Some are to provide money to help the developer to secure leases while others are for house-flipping firms.

If you are wondering why you there is such a buzz about this investment opportunity now, it is because it is relatively new in the United States. It has only been since a law changed in September, 2012, that real estate developers are allowed to market their projects directly to the public through these web portals.

There’s no denying that crowdfunding is attractive to many small investors and it is easy to see why. You are buying something substantial like a strip mall, a senior’s residence or a golf community, rather than crowdfunding in the traditional way of supporting a starving artist to make a new CD.
But like all investing, there is also a possibility of fraud or failure.

There are ways you can protect yourself to a certain extent.

Before you invest a penny, make sure that the real estate portal you are considering is compliant with the Securities and Exchange Commission or its equivalent if you are looking outside the United States.

Read the fine print and be sure you are fully aware of all fees involved and what kind of return you can reasonably expect. Are you being promised that all your investment will be returned and then some, or just a small proportion? And when can you reasonably expect some return. In a few months or will it be years?
Research the project as thoroughly as you can. Study the company’s successes and failures, check out the legitimacy of the advisory board members and look into the current management as much as you can.

If the portal will not provide any information about the company or its management they invite you to invest in, interpret that as a warning sign.


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