Although the real estate market is currently booming, the last housing bubble burst remains relatively fresh in investors’ minds and that has many taking a long look at crowdfunding.
One of the lessons that came out of the burst and ensuing Great Recession was that investors were blind to where their money went. If you watched the Academy Award-winning film “The Big Short,” then you at least understand Hollywood’s hyperbolic explanation of the subprime mortgage crisis. You may be asking: what does this have to do with real estate crowdfunding real investing? Well, everything.
Among the key reasons that the financial collapse occurred was the fact that investors had no clue what was in the AAA collateralized debt obligations (CDOs). Most people didn’t know what was in them and others simply did not care. At the end of the day, Americans lost massive amounts of wealth because they were not hands-on about investing.
That’s a primary reason why real estate crowdfunding platforms are trending. Crowdfunded real estate investments tend to be more of an open book. Consider the transparency differences between crowdfunding and a real estate investment trust (REIT).
Transparency: Crowdfunding Or REIT
Let’s assume that you are not particularly keen on buying an investment property and becoming a landlord. Although renting yourself has its benefits, it can also be labor intensive at times. That being said, wealth-building alternatives such as REITs and crowdfunding present opportunities that require less effort.
REITs tend to be the more hands-off than crowdfunding. That’s because REITs are generally traded funds. Dating back to 1971, the FTSE Nareit REIT index reportedly yielded a return of 9.72 percent. Some REIT investments do quite well in specific sectors such as self-storage and office space among others.
But REITs can be widely diversified, and some have non-real estate assets embedded in them. An REIT with hundreds of moving parts can be onerous to track. That makes them feel a lot like the CDOs. This is not to imply that REITs are a scam like those CDOs. It’s just that crowdfunding investments are more clear.
When investors opt for crowdfunded real estate investments, it falls on their shoulders to select specific properties for their portfolio. Unlike an REIT in which you just buy in and someone else manages the entire fund, crowdfund investors pick real estate options one at a time. In many ways, it is like becoming a landlord, just with someone else doing the legwork. At the end of the day, there’s less need for transparency because you picked all the assets yourself.
Why Consider Real Estate Crowdfunding?
Besides not having to do the heavy lifting, real estate crowdfunding generally avoids much of the volatility of the market-driven REITs and stocks. Everyday people are not investing the market per se, just the select properties you feel confident about. Also, the IRS reportedly allows investors to deduct depreciation.
But what makes real estate crowdfunding increasingly popular is that it allows people to invest directly into tangible properties without having to take on landlord responsibilities. Simply put, you know what you are buying.
Checking your credit and becoming pre-approved are important first steps for most home purchases. It is important to discuss other factors, including seasoning of funds, when considering options like crowdfunding. These are all steps your trusted home mortgage professional can help you navigate.